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A Monetary-Fiscal Theory of Sudden Inflations

Marco Bassetto and David Miller

No 641, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper posits an information channel as the explanation for sudden inflations. Consumers saving via nominal government bonds face a choice whether to acquire costly information about future government surpluses. They trade off the cost of acquiring information about the surpluses that back bond repayment against the benefit of a more informed saving decision. Through the information channel, small changes in the economic environment can trigger large responses in consumers' behavior and prices. This setting explains why there can be long stretches of time during which government surpluses have large movements with little inflation response; yet, at some point, something snaps, and a sudden inflation takes off that is strongly responsive to incoming fiscal news.

Keywords: Fiscal theory of the price level; Sudden inflation; Monetary fiscal interaction; Price level determination (search for similar items in EconPapers)
JEL-codes: E31 E51 E52 E63 (search for similar items in EconPapers)
Date: 2022-12-16
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (3)

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DOI: 10.21034/sr.641

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