Can fiscal consolidations announcements help anchor inflation expectations?

Antonio David, Samuel Pienknagura and Juan F. Yépez

Journal of International Money and Finance, 2025, vol. 151, issue C

Abstract: Using quarterly economic data and a comprehensive database on fiscal policy consolidation announcements for a sample of advanced economies and emerging markets, we quantify the effects of fiscal tightening on inflation expectations. We find that fiscal consolidation announcements reduce inflation expectations over the medium-term (three and five-years ahead), but not in the short-term (one-year ahead). There is also some evidence that consolidation announcements reduce “disagreement” about expected future inflation at longer horizons. The inflation anchoring role of consolidation announcements is enhanced by the strength of a country's fiscal and monetary frameworks, and when fiscal and monetary policy work in tandem. In addition, we find that initial conditions matter—inflation expectation's response to consolidation announcements is larger in periods of high contemporaneous inflation. With these results in hand, we show that the effectiveness of fiscal consolidation in limiting realized inflation depends greatly on the response of inflation expectations to consolidation announcements. These results show that fiscal policy is crucial to anchor inflation expectations and a key element of a credible disinflationary process.

Keywords: Fiscal consolidations; Fiscal policy; Inflation expectations; Narrative approach (search for similar items in EconPapers)
JEL-codes: E31 E62 E63 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560624002341
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Can Fiscal Consolidation Announcements Help Anchor Inflation Expectations? (2024)
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:eee:jimfin:v:151:y:2025:i:c:s0261560624002341

DOI: 10.1016/j.jimonfin.2024.103247

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().