Fiscal Requirements for Price Stability When Households are Not Ricardian

Stéphane Dupraz and Anna Rogantini Picco

Working papers from Banque de France

Abstract: Are restrictions on fiscal policy necessary for monetary policy to be able to deliver price stability? When households are Ricardian, the Fiscal Theory of the Price Level asserts that the government's intertemporal budget constraint must hold for on-target inflation. We show that when households are not Ricardian, fiscal requirements still exist but are very different. (1) Intertemporal budget constraints no longer impose any significant requirement on fiscal policy for price stability. A requirement derived from intertemporal budget constraints still exists, but it does not correspond to the one of the government and imposes much looser requirements on fiscal policy than in the Ricardian case. (2) Yet a second requirement exists, specific to non-Ricardian households: Public debt must remain below a threshold. Above it, its wealth effect on aggregate spending can no longer be counter-balanced by interest rate hikes, however large. This second requirement puts an upper bound on public debt regardless of future fiscal surpluses. Assessing risks of fiscal dominance is therefore very different when households are not Ricardian.

Keywords: Monetary De-Anchoring; Taylor Principle; Bounded Rationality (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.banque-france.fr/system/files/2024-12/WP981.pdf

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:bfr:banfra:981

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().