The Inflationary Footprint of Fiscal Policy: Evidence from Disaggregated U.S. Spending

Guido Ascari, Anna Florio, Alessandro Gobbi and Leonardo Melosi

No 20687, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Theory shows that fiscal spending shocks generate wealth effects when they are perceived to lack credible backing. Fiscal backing is an intertemporal concept, as it depends on expectations about the availability of fiscal resources to cover debt over time, making it difficult to measure empirically. For defense spending, immediate fund availability serves as a useful proxy, whereas for mandatory programs it does not, and mandatory spending does not generate wealth effects except when it entails a persistent structural shift, as in the Social Security expansions of the 1960s. Unbacked wartime buildups are a significant driver of inflation and output.

Date: 2025-09
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