Perceptions and Misperceptions of Fiscal Inflation

Eric Leeper and Todd Walker

No 17903, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Great Recession and worldwide financial crisis have exploded fiscal imbalances and brought fiscal policy and inflation to the forefront of policy concerns. Those concerns will only grow as aging populations increase demands on government expenditures in coming decades. It is widely perceived that fiscal policy is inflationary if and only if it leads the central bank to print new currency to monetize deficits. Monetization can be inflationary. But it is a misperception that this is the only channel for fiscal inflations. Nominal bonds, the predominant form of government debt in advanced economies, derive their value from expected future nominal primary surpluses and money creation; changes in the price level can align the market value of debt to its expected real backing. This introduces a fresh channel, not requiring explicit monetization, through which fiscal deficits directly affect inflation. The paper describes various ways in which fiscal policy can directly affect inflation and explains why these fiscal effects are difficult to detect in time series data.

JEL-codes: E31 E52 E62 E63 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-mac
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Published as Perceptions and Misperceptions of Fiscal Inflation , Eric M. Leeper, Todd B. Walker. in Fiscal Policy after the Financial Crisis , Alesina and Giavazzi. 2013

Downloads: (external link)
http://www.nber.org/papers/w17903.pdf (application/pdf)

Related works:
Chapter: Perceptions and Misperceptions of Fiscal Inflation (2012)
Working Paper: Perceptions and misperceptions of fiscal inflation (2011)
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:nbr:nberwo:17903

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w17903

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().