Vincent Sterk

Since 2022, governments across Europe have implemented large fiscal packages to shield households from sharp increases in food and energy prices. These packages combined price controls/subsidies with targeted fiscal transfers. We evaluate these detailed interventions in a multi-sector New Keynesian model with household heterogeneity, matched directly to micro data on income, wealth, and consumption baskets. Within this setting, we characterize the aggregate demand and supply effects of these policies and derive a micro-founded social welfare function that admits a decomposition revealing the underlying distortions. Evaluating the recent fiscal package in the United Kingdom, we find that it reduced social welfare, and that welfare losses can be more than five times as large once macro channels are accounted for.