Fiscal policy and inflation: accounting for non-linearities in government debt

Cristina Checherita-Westphal and Tom Pesso
Authors registered in the RePEc Author Service: Cristina Checherita Westphal

No 2996, Working Paper Series from European Central Bank

Abstract: This paper investigates the interplay between discretionary fiscal policy and inflation in the euro area, emphasizing the role of public debt levels in modulating this relationship. It explores how fiscal expansions or contractions influence inflationary pressures, particularly under varying debt conditions. The analysis reveals that fiscal policy’s effect on inflation is non-linear, with debt levels significantly affecting the inflationary outcome of fiscal measures. High debt levels tend to amplify the inflation response to fiscal expansions, a finding that holds under multiple analytical frameworks and robustness checks. This paper contributes to the empirical literature by highlighting the critical role of fiscal policy, especially in high-debt environments, and its implications for inflation dynamics in the euro area. JEL Classification: E31, E62, H63

Keywords: fiscal policy; inflation; local projections; public debt (search for similar items in EconPapers)
Date: 2024-11
New Economics Papers: this item is included in nep-eec and nep-mon
Note: 1790315
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242996

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