 Household Beliefs about Fiscal DominancePhilippe Andrade, Erwan Gautier, Eric Mengus, Emanuel Moench and Tobias Schmidt No 19862, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: We provide direct micro evidence that households link public debt and inflation in a way consistent with a fiscal dominance logic. We design a randomized controlled trial to identify how fiscal news lead individuals to revise their debt-to-GDP and inflation expectations. We also provide a way to elicit individuals’ views about the fiscal space. Consistent with fiscal dominance, we find that individuals who consider that fiscal resources are stretched also associate larger debt-to-GDP with higher inflation. By contrast, individuals who think there is fiscal space do not make that connection. We study how these results matter for monetary pol- icy by introducing a New Keynesian model in which agents have heterogeneous beliefs about the fiscal space. Such beliefs imply a policy tradeoff for the central bank: Agents who expect fiscal dominance in the future exert upward pressures on inflation. Even an active central bank partially tolerates these price pressures due to the real costs of completely stabilizing prices. Keywords: Inflation; expectations (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:19862 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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