Fiscal threats to price stability when households are not Ricardian

Stéphane Dupraz and Anna Rogantini Picco

No 3038, Working Paper Series from European Central Bank

Abstract: Can monetary policy deliver price stability whatever fiscal policy does? With Ricardian households, no: Public debt must be backed by future fiscal surpluses. But if that fiscal backing holds, monetary policy can deliver price stability by responding sufficiently strongly to inflation. We reconsider the question when households are not Ricardian. First, although public debt need not always be backed by future surpluses, fiscal requirements still exist in a different form: Public debt cannot be so high that its wealth effect on aggregate spending prevents the existence of a natural interest rate. Second, if this condition is satisfied, monetary policy can deliver price stability, but it must respond directly to the level of public debt—not just to the inflation that higher debt creates. JEL Classification: E31, E62

Keywords: monetary-fiscal Interactions; non-Ricardian households; price stability (search for similar items in EconPapers)
Date: 2025-03
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