A Fiscal Theory of Persistent Inflation

Francesco Bianchi, Renato Faccini and Leonardo Melosi

No 30727, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a new class of general equilibrium models with partially unfunded debt to propose a fiscal theory of persistent inflation. In response to business cycle shocks, the monetary authority controls inflation and the fiscal authority stabilizes debt. How- ever, the central bank accommodates unfunded fiscal shocks, causing persistent movements in inflation, output, and real interest rates. In an estimated quantitative model, fiscal inflation accounts for the bulk of inflation dynamics. In the aftermath of the pandemic, unfunded fiscal shocks sustain the recovery, but also cause a persistent increase in inflation. The model is able to predict the inflationary effects of the ARPA fiscal stimulus out of sample and with real time data.

JEL-codes: E30 E50 E62 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (4)

Published as Francesco Bianchi & Renato Faccini & Leonardo Melosi, 2023. "A Fiscal Theory of Persistent Inflation," The Quarterly Journal of Economics, vol 138(4), pages 2127-2179.

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