Inflation’s role in optimal monetary-fiscal policy

Eric M. Leeper and Xuan Zhou

Journal of Monetary Economics, 2021, vol. 124, issue C, 1-18

Abstract: We address the optimal marginal source of financing shocks that raise fiscal needs in the presence of a maturity structure for nominal government debt, distortionary taxes, and sticky prices. We find: (1) the importance of innovations in current and expected inflation that revalue debt increases with both the average maturity and the level of debt; (2) an analytical trade off between inflation and output-gap stabilization as a function of debt maturity; (3) at current debt levels and maturity lengths in advanced economies, inflation would account for as much as 50 percent of marginal optimal financing; (4) maturity attenuates welfare losses from nominal rigidities.

Keywords: Inflation; Tax smoothing; Debt management; Debt maturity; Fiscal finance (search for similar items in EconPapers)
JEL-codes: E31 E52 E62 E63 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393221001173
Full text for ScienceDirect subscribers only

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:eee:moneco:v:124:y:2021:i:c:p:1-18

DOI: 10.1016/j.jmoneco.2021.10.006

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().