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Do enlarged fiscal deficits cause inflation? The historical record

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  • Michael D. Bordo
  • Mickey D. Levy

Abstract

We survey the historical record for two centuries on the connection between expansionary fiscal policy and inflation. The relationship holds in wartime when fiscally stressed governments resorted to the inflation tax. In two peacetime episodes in the early twentieth century, bond‐financed fiscal deficits, unbacked by future taxes, may have contributed to inflation. Fiscal influence on monetary policy was important in the Great Inflation 1965–1983. Expansionary monetary and fiscal policy did not lead to inflation in the Global Financial Crisis of 2007–08 but, by contrast, the fiscal and monetary response to the COVID‐19 pandemic may involve risks of fiscal dominance and future inflation.

Suggested Citation

  • Michael D. Bordo & Mickey D. Levy, 2021. "Do enlarged fiscal deficits cause inflation? The historical record," Economic Affairs, Wiley Blackwell, vol. 41(1), pages 59-83, February.
    • Handle: RePEc:bla:ecaffa:v:41:y:2021:i:1:p:59-83
    DOI: 10.1111/ecaf.12446
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    References listed on IDEAS

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    8. Gmeiner, Robert & Larson, Sven, 2023. "The Fiscal Transmission Mechanism of Inflation," MPRA Paper 116250, University Library of Munich, Germany.
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    10. Ken Matsumoto, 2024. "Reconsideration of modern monetary theory-type fiscal and monetary stabilization policy from a viewpoint of the dynamic Keynesian model," Asia-Pacific Journal of Regional Science, Springer, vol. 8(2), pages 737-754, June.
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    14. Pierre L Siklos, 2022. "Monetary, fiscal and demographic interactions in Japan: impact and a comparative assessment," Working Papers halshs-03776217, HAL.
    15. Meng, Fanting, 2024. "Driving sustainable development: Fiscal policy and the promotion of natural resource efficiency," Resources Policy, Elsevier, vol. 90(C).
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    19. Ryan Niladri Banerjee & Valerie Boctor & Aaron Mehrotra & Fabrizio Zampolli, 2023. "Fiscal sources of inflation risk in EMDEs: the role of the external channel," BIS Working Papers 1110, Bank for International Settlements.

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