Can Fiscal Consolidation Announcements Help Anchor Inflation Expectations?

Antonio David, Samuel Pienknagura and Juan Yepez

No 2024/060, IMF Working Papers from International Monetary Fund

Abstract: In this paper, we use quarterly data and a novel database on fiscal policy consolidation announcements, for a sample of advanced economies and emerging markets to quantify the effects of fiscal tightening on inflation expectations. We find that fiscal consolidation announcements reduce inflation expectations over the medium-term (three and five-years ahead), but not in the short-term (one-year ahead). There is also some evidence that consolidation announcements reduce “disagreement” about expected future inflation at longer horizons. The inflation anchoring role of consolidation announcements is enhanced by the strength of a country’s fiscal and monetary frameworks, and when fiscal and monetary policy work in tandem. In addition, we find that initial conditions matter—inflation expectation’s response to consolidation announcements is larger in periods of high contemporaneous inflation. With these results in hand, we show that the effectiveness of fiscal consolidation in controlling realized inflation depends greatly on the response of inflation expectations to consolidation announcements. These results show that fiscal policy is crucial to anchor inflation expectations and a key element of a credible disinflationary process.

Keywords: Fiscal Consolidations; Fiscal Policy; Inflation Expectations; Narrative Approach; inflation expectation; fiscal consolidation announcement; response to consolidation announcement; contemporaneous inflation; expectations to consolidation announcement; Inflation; Fiscal consolidation; Fiscal stance; Inflation targeting; Emerging and frontier financial markets; Global; Western Hemisphere (search for similar items in EconPapers)
Pages: 39
Date: 2024-03-15
New Economics Papers: this item is included in nep-cba and nep-mon
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Journal Article: Can fiscal consolidations announcements help anchor inflation expectations? (2025)
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