Printing away the mortgages: Fiscal inflation and the post-covid boom

William Diamond, Tim Landvoigt and Germán Sánchez Sánchez

Journal of Financial Economics, 2025, vol. 171, issue C

Abstract: We analyze interactions between fiscal and monetary stimulus in a new Keynesian model with nominal mortgage debt that can be inflated away. Redistributive transfers are most impactful when followed by a temporary deviation from inflation-targeting monetary policy. Unlike other fiscal policies, redistribution causes inflation even in the absence of long-run debt sustainability problems, and inflating away mortgages results in additional redistribution. In a quantitative model with mortgage refinancing frictions, transfer payments provide much more stimulus than the redistributive effects of inflation. Borrowers gradually refinance after their mortgages are inflated away, dampening their immediate consumption response and reducing their long-run labor supply.

Keywords: Fiscal/monetary policy; Covid-19; Household finance; Mortgage markets; Inflation (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:171:y:2025:i:c:s0304405x25000807

DOI: 10.1016/j.jfineco.2025.104072

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