Fiscal Foundations of Inflation: Imperfect Knowledge

Stefano Eusepi and Bruce Preston

American Economic Review, 2018, vol. 108, issue 9, 2551-89

Abstract: This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. Because imperfect knowledge breaks Ricardian equivalence, the scale and composition of the public debt matter for inflation. High and moderate duration debt generates wealth effects on consumption demand that impairs the intertemporal substitution channel of monetary policy: aggressive monetary policy is required to anchor inflation expectations. Counterfactual experiments conducted in an estimated model reveal that the US economy would have been substantially more volatile over the Great Inflation and Great Moderation periods if US debt levels had been those observed in Italy or Japan.

JEL-codes: D84 E31 E32 E52 E62 H63 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/aer.20131461
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Citations: View citations in EconPapers (31)

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Related works:
Working Paper: Fiscal foundations of inflation: Imperfect knowledge (2017)
Working Paper: Fiscal foundations of inflation: imperfect knowledge (2013)
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