On the Mechanics of Fiscal Inflations

Marco Bassetto, Luca Benzoni and Jason Hall

Quarterly Review, 2024, vol. 44, issue 2

Abstract: The goal of this paper is twofold. First, we wish to better explain the relationship between Sargent and Wallace’s (1981) unpleasant monetarist arithmetic, the closely connected fiscal theory of the price level (FTPL), and the monetarist view of inflation. Second, we discuss how the recent inflationary episode has contributed to redistributing real resources from holders of government debt to the public purse. In particular, financial prices before the onset of the COVID pandemic suggest that investors viewed an inflationary shock such as the one we experienced as extremely unlikely, so the magnitude of this redistribution caught them by surprise.

Keywords: Inflation expectations; Fiscal theory of the price level; Fiscal inflation (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 E63 (search for similar items in EconPapers)
Date: 2024
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Working Paper: On the Mechanics of Fiscal Inflations (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmqr:98599

DOI: 10.21034/qr.4421

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