Fiscal foundations of inflation: Imperfect knowledge

Stefano Eusepi and Bruce Preston

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. Because imperfect knowledge breaks Ricardian equivalence the scale and composition of the public debt matter for inflation. High moderate-duration debt generates wealth effects on consumption demand that impairs the intertemporal substitution channel of monetary policy: aggressive monetary policy is required to anchor inflation expectations. Counterfactual experiments, in an estimated medium-scale DSGE model, reveal the US economy would have been substantially more volatile over the Great Inflation and Great Moderation periods, had average debt been consistent with levels currently observed in Italy or Japan.

Keywords: Monetary and Fiscal Interactions; Learning Dynamics; Expectations Stabilization; Great Moderation; Great Inflation (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2017-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-knm, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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https://cama.crawford.anu.edu.au/sites/default/fil ... 7_eusepi_preston.pdf (application/pdf)

Related works:
Journal Article: Fiscal Foundations of Inflation: Imperfect Knowledge (2018)
Working Paper: Fiscal foundations of inflation: imperfect knowledge (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2017-34

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