Fiscal Requirements for Price Stability When Households are not Ricardian

Dupraz, Stéphane and Anna Rogantini Picco

No 20599, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Are restrictions on fiscal policy necessary for monetary policy to deliver price stability? When households are Ricardian, the net present value of future fiscal surpluses needs to equate the real value of government debt under stable prices. We show that when households are not Ricardian, fiscal requirements still exist but take a fundamentally different form: a limit on the debt-to-GDP ratio. Beyond that limit, no interest rate hike however large can counterbalance the wealth effect of public debt on aggregate spending. To implement price stability when the debt-to-GDP requirement is satisfied, monetary policy must respond to the level of public debt and not just to the inflation it creates.

Keywords: Monetary-fiscal interaction; Non-ricardian households; Price stability (search for similar items in EconPapers)
JEL-codes: E31 E62 (search for similar items in EconPapers)
Date: 2025-08
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