Do Deficits Cause Inflation? A High Frequency Narrative Approach

Jonathon Hazell and Stephan Hobler

No 19928, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper measures the causal effect of deficits on inflation using a “high frequency narrative approach†. We identify an event that released news about the 2021 deficits in the United States—the Georgia Senate election runoff. We calculate the size of the shock using new narrative data from investment banks. We then study the high frequency response of inflation forecasts from asset prices, in order to separate deficits from other factors affecting inflation. We estimate an “inflation multiplier†of 0.19% price level growth over two years, for a 1% deficit-to-GDP shock. Our estimate implies that the 2021 deficits caused around a third of the 2021-22 inflation—meaning deficits were important but not the only cause. A heterogeneous agent New Keynesian model quantitatively matches the size and dynamics of the inflation multiplier.

Keywords: Deficits; Inflation (search for similar items in EconPapers)
JEL-codes: E31 E62 (search for similar items in EconPapers)
Date: 2025-02
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP19928 (application/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:cpr:ceprdp:19928

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP19928

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.
Bibliographic data for series maintained by CEPR ().