Fiscalflation in Germany? Applying the FTPL to Post-Pandemic Inflation

Florian Frühhaber

Applied Economics Quarterly (formerly: Konjunkturpolitik), 2023, vol. 69, issue 2, 81-101

Abstract: This paper applies the fiscal theory of the price level (FTPL) to study the drivers of inflation in Germany following the pandemic. The empirical analysis uses a novel empirical approach built on the FTPL’s equilibrium condition. We find that the FTPL predicts an increase in the equilibrium price level of 6 % from 2019 to 2022. The increase is driven by higher discount rates. In contrast, fiscal deficits had a mild deflationary effect. Only if expectations regarding the future structural fiscal stance changed during these years, would the FTPL be able to link the observed inflation surge to fiscal policy behavior. Trans-Abstract: Fiscalflation in Germany? Applying the FTPL to Post-Pandemic Inflation This paper applies the fiscal theory of the price level (FTPL) to study the drivers of inflation in Germany following the pandemic. The empirical analysis uses a novel empirical approach built on the FTPL’s equilibrium condition. We find that the FTPL predicts an increase in the equilibrium price level of 6 % from 2019 to 2022. The increase is driven by higher discount rates. In contrast, fiscal deficits had a mild deflationary effect. Only if expectations regarding the future structural fiscal stance changed during these years, would the FTPL be able to link the observed inflation surge to fiscal policy behavior.

Keywords: inflation; fiscal policy; fiscal theory of the price level; E620; E630 (search for similar items in EconPapers)
JEL-codes: E62 E63 (search for similar items in EconPapers)
Date: 2023
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