Lack of Trust and Fiscal Dominance: Evidence from a Firm Survey Experiment

Francesco Bianchi, Renato Faccini, Leonardo Melosi and Wehrhöfer, Nils

No 21595, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how debt news shapes firms' inflation expectations in a monetary union. In an active-control experiment, German firms receive optimistic or pessimistic projections of France, Italy, and Spain's debt-to-GDP ratios. Pessimistic news raises debt beliefs and increases one- and three-year inflation expectations, with no detectable effect at five years. The response is driven by low-trust firms and by firms expecting relatively low ECB policy rates. A salient German debt-financed fiscal shock generates no comparable response. Within a Fisherian framework, the evidence suggests that debt news becomes inflationary when firms perceive incomplete fiscal backing and expect monetary accommodation.

JEL-codes: C93 D84 E31 E52 E62 (search for similar items in EconPapers)
Date: 2026-06
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