The Fiscal Roots of Inflation

John Cochrane

No 25811, NBER Working Papers from National Bureau of Economic Research, Inc

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-termbonds.

JEL-codes: E31 E63 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: AP EFG
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Citations: View citations in EconPapers (5)

Published as John H. Cochrane, 2021. "The fiscal roots of inflation," Review of Economic Dynamics, .

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Journal Article: The fiscal root of inflation (2022)
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