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Fiscalflation in Germany? Applying the FTPL to Post-Pandemic Inflation

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  • Florian Frühhaber

Abstract

This paper applies the fiscal theory of the price level (FTPL) to study the drivers of inflation in Germany following the pandemic. The empirical analysis uses a novel empirical approach built on the FTPL’s equilibrium condition. We find that the FTPL predicts an increase in the equilibrium price level of 6 % from 2019 to 2022. The increase is driven by higher discount rates. In contrast, fiscal deficits had a mild deflationary effect. Only if expectations regarding the future structural fiscal stance changed during these years, would the FTPL be able to link the observed inflation surge to fiscal policy behavior. Trans-Abstract: Fiscalflation in Germany? Applying the FTPL to Post-Pandemic Inflation This paper applies the fiscal theory of the price level (FTPL) to study the drivers of inflation in Germany following the pandemic. The empirical analysis uses a novel empirical approach built on the FTPL’s equilibrium condition. We find that the FTPL predicts an increase in the equilibrium price level of 6 % from 2019 to 2022. The increase is driven by higher discount rates. In contrast, fiscal deficits had a mild deflationary effect. Only if expectations regarding the future structural fiscal stance changed during these years, would the FTPL be able to link the observed inflation surge to fiscal policy behavior.

Suggested Citation

  • Florian Frühhaber, 2023. "Fiscalflation in Germany? Applying the FTPL to Post-Pandemic Inflation," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 69(2), pages 81-101.
    • Handle: RePEc:dah:aeqaeq:v69_y2023_i2_q2_p81-101
    DOI: 10.3790/aeq.69.2.81
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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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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