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The fiscal root of inflation

Author

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  • John Cochrane

    (Stanford University)

Abstract

Unexpected inflation devalues nominal government bonds. It must therefore correspond to a decline in expected future surpluses, or a rise in their discount rates, so that the real value of debt equals the present value of surpluses. I measure each component using a vector autoregression, via responses to inflation, recession, surplus and discount rate shocks. Discount rates account for much inflation variation, for the cyclical pattern of inflation, and why persistent deficits often do not cause inflation. Long-term debt is important. In response to a fiscal shock, smooth inflation slowly devalues outstanding long-term bonds. (Copyright: Elsevier)

Suggested Citation

  • John Cochrane, 2022. "The fiscal root of inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 22-40, July.
    • Handle: RePEc:red:issued:20-493
    DOI: 10.1016/j.red.2021.06.002
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    References listed on IDEAS

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    Cited by:

    1. Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2020. "Manufacturing Risk-free Government Debt," NBER Working Papers 27786, National Bureau of Economic Research, Inc.
    2. Marco Bassetto & Gherardo Gennaro Caracciolo, 2021. "Monetary/Fiscal Interactions with Forty Budget Constraints," Working Papers 788, Federal Reserve Bank of Minneapolis.
    3. Lamia Bazzaoui & Jun Nagayasu, 2021. "Is Inflation Fiscally Determined?," Sustainability, MDPI, vol. 13(20), pages 1-26, October.
    4. Vadim Elenev & Tim Landvoigt & Patrick J. Shultz & Stijn Van Nieuwerburgh, 2021. "Can Monetary Policy Create Fiscal Capacity?," NBER Working Papers 29129, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Fiscal theory of the price level; Monetary policy; Fiscal policy; Inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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