The Fiscal Roots of Inflation
69 Pages Posted: 25 May 2019 Last revised: 9 Jun 2021
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The Fiscal Roots of Inflation
The Fiscal Roots of Inflation
Date Written: April 28, 2019
Abstract
Unexpected inflation devalues nominal government bonds. It must therefore correspond to a decline in expected future surpluses, or a rise in their discount rates, so that the real value of debt equals the present value of surpluses. I measure each component using a vector autoregression, via responses to inflation, recession, surplus and discount rate shocks. Discount rates account for much inflation variation, for the cyclical pattern of inflation, and why persistent deficits often do not cause inflation. Long-term debt is important. In response to a fiscal shock, smooth inflation slowly devalues outstanding long-term bonds.
Keywords: inflation, fiscal theory of the price level, monetary policy
JEL Classification: E5
Suggested Citation: Suggested Citation