Unconventional fiscal policies in response to inflation: The Iberian exception in Portugal

Abstract

The surge in Eurozone inflation in 2022 compelled European governments to implement unconventional fiscal policies. One initiative, the Iberian Exception, imposed a cap on the cost of natural gas used for electricity generation in Portugal and Spain. Using a Bayesian Vector Autoregressive model combined with Bayesian Dynamic Forecasting, we predict a 3.14 p.p. in energy inflation from July 2022 to December 2023. The effect was asymmetric over time, given the structure of contracts and hedging mechanisms within the Iberian Electricity Market. The results highlight the effectiveness of unconventional fiscal policies for managing supply-driven inflationary pressures.