Household Beliefs about Fiscal Dominance

Philippe Andrade, Erwan Gautier, Eric Mengus, Emanuel Moench and Tobias Schmidt

No 1535, HEC Research Papers Series from HEC Paris

Abstract: We study beliefs about fiscal dominance in a survey of German households. We first use a randomized controlled trial to identify how fiscal news impact individual debt-to-GDP and inflation expectations. We document that the link between debt and inflation crucially depends on individuals’ views about the fiscal space. News leading individuals to expect higher debt-to-GDP ratios make them more likely to revise upward their inflation expectations. These average effects are due to individuals who think that fiscal resources are more stretched than others. In contrast, individuals who think there is fiscal space do not associate debt with inflation. We then rationalize these results in a New Keynesian model where agents have heterogeneous beliefs about the fiscal space. We show that the heterogeneity of beliefs implies a policy tradeoff for the central bank. Agents who expect fiscal dominance in the future exert upward pressure on inflation. An active central bank may chose to partially tolerate this higher inflation due to the real costs of completely stabilizing prices.

Keywords: fiscal and monetary policy; heterogeneous beliefs; ran- domized control trial; survey data; Inflation expectations (search for similar items in EconPapers)
JEL-codes: C83 D84 E31 E63 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2025-01-14
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Related works:
Working Paper: Household Beliefs about Fiscal Dominance (2025)
Working Paper: Household Beliefs about Fiscal Dominance (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1535

DOI: 10.2139/ssrn.5097443

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