Inflation and how to deal with it in France. A policy perspective from an empirical stock‐flow model

Abstract

Using an empirical stock‐flow consistent model, we simulate an imported inflationary shock to analyze the macroeconomic impacts on the French economy. Facing the risk of a profit‐price‐wage spiral; alternative economic policy responses are evaluated. Traditional restrictive monetary policy does not seem well‐suited to fight imported inflation as the cost is significant with limited and delayed results. Increased social transfers can help workers support their loss of purchasing power. Reduced Value Added Tax can directly limit the inflation drift, but its concrete implementation may raise difficulties. These measures have a cost for public finances but are affordable if the inflation shock is temporary.