Fiscal Inflation With Incomplete Information

Junjie Guo (), Zhao Han and Abhiprerna Smit
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Junjie Guo: School of Finance, Central University of Finance and Economics, Beijing, China

Working Papers from Economics Department, William & Mary

Abstract: We quantify fiscal inflation through the lens of incomplete information between funded and unfunded fiscal shocks. Information friction naturally breaks the Ricardian equivalence for deficits to be inflationary. We identify the unfunded shock through a pair of interconnected short-term debt and inflation targets that vary over time. Qualitatively, incomplete information alters the effects of both monetary and fiscal shocks on inflation. Quantitatively, in response to an unfunded shock, the inflation responses are approximately 40%-64% lower compared to the case of full information. Both fiscal stimulus and supply shocks contribute significantly to COVID inflation. An unfunded tax cut can increase output and reduce debt burden, at the cost of higher lingering inflation.

Keywords: Inflation Dynamics; Fiscal Policy; Incomplete Information; Expectation Formation (search for similar items in EconPapers)
JEL-codes: C11 D80 E31 E62 H60 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2026-02-11
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DOI: 10.2139/ssrn.5555120

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