War in the Ukraine and global inflationary pressures: How fiscal and monetary policy should cooperate in the face of temporary supply side shocks
This paper discusses how to build a simple model of the optimal policy responses to a temporary rise in energy prices, a situation like that caused by the war in Ukraine. The objective is to avoid the emergence of a wage price spiral, in the presence of the kind of real-wage resistance which has been shown to be empirically important, and yet also to avoid large increases in interest rates. We believe that this outcome might have been achieved by means of a very large cut in consumption taxes (or a very large subsidy to energy supply).