A Fiscal Theory of Persistent Inflation

Francesco Bianchi, Renato Faccini and Leonardo Melosi

No 17690, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a new class of general equilibrium models with partially unfunded debt to propose a fiscal theory of persistent inflation. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. However, the central bank accommodates unfunded fiscal shocks, causing persistent movements in inflation, output, and real interest rates. In an estimated quantitative model, fiscal inflation accounts for the bulk of inflation dynamics. In the aftermath of the pandemic, unfunded fiscal shocks sustain the recovery, but also cause a persistent increase in inflation. The model is able to predict the inflationary effects of the ARPA fiscal stimulus out of sample and using real time data.

JEL-codes: E30 E50 E62 (search for similar items in EconPapers)
Date: 2022-11
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17690 (application/pdf)

Related works:
Journal Article: A Fiscal Theory of Persistent Inflation* (2023)
Working Paper: A Fiscal Theory of Persistent Inflation (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17690

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17690

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().