Deficits and Inflation: HANK meets FTPL

George-Marios Angeletos, Chen Lian and Christian Wolf

No 33102, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the Fiscal Theory of the Price Level (FTPL), households are Ricardian, so fiscal deficits drive output and inflation only under hard-to-test assumptions about which policy authority is “active” or “dominant.” In the Heterogeneous Agent New Keynesian (HANK) paradigm, households are instead non-Ricardian, so deficits drive aggregate demand, and thereby also inflation, through classical wealth or liquidity effects. Because of this difference, HANK is free of FTPL’s fragilities and controversies. Despite this difference, HANK actually reproduces FTPL’s core empirical predictions regarding the relation between deficits and inflation. This is true even for the most extreme FTPL scenario, where unfunded deficits are financed entirely by inflation-induced debt erosion. In practice, however, deficit-financed fiscal stimuli can help expand output and thus tax revenue, substituting for debt erosion and moderating the associated inflationary pressures.

JEL-codes: E3 E6 (search for similar items in EconPapers)
Date: 2024-11
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
Note: EFG ME
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.nber.org/papers/w33102.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:33102

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w33102
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().