Inflation and the role of macroeconomic policies: A model for the case of Denmark

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Abstract

This paper provides an assessment of the different channels through which monetary, fiscal and income policies affect prices and output in a small open economy and discuss which policy measures are effective and feasible in the face of inflationary shocks. We build a stock-flow-consistent model using sectoral data for Denmark. We then replicate the inflationary environment faced by Denmark and several other countries after the Covid-19 crisis. While taking monetary tightening as a forced policy response for a small open economy with fixed exchange rate, we explore a number of policies that, within the current institutional and legal framework, can potentially mitigate the effects of inflation. Our conclusion is that a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Furthermore, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability.

Original languageEnglish
JournalStructural Change and Economic Dynamics
Volume67
Pages (from-to)32-43
Number of pages12
ISSN0954-349X
DOIs
Publication statusPublished - Dec 2023

Bibliographical note

Publisher Copyright:
© 2023 The Author(s)

Keywords

  • Fiscal policy
  • Income policy
  • Inflation
  • Monetary policy
  • Stock-flow consistent model

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