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Printing away the mortgages: Fiscal inflation and the post-covid boom

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  • Diamond, William
  • Landvoigt, Tim
  • Sánchez, Germán Sánchez

Abstract

We analyze interactions between fiscal and monetary stimulus in a new Keynesian model with nominal mortgage debt that can be inflated away. Redistributive transfers are most impactful when followed by a temporary deviation from inflation-targeting monetary policy. Unlike other fiscal policies, redistribution causes inflation even in the absence of long-run debt sustainability problems, and inflating away mortgages results in additional redistribution. In a quantitative model with mortgage refinancing frictions, transfer payments provide much more stimulus than the redistributive effects of inflation. Borrowers gradually refinance after their mortgages are inflated away, dampening their immediate consumption response and reducing their long-run labor supply.

Suggested Citation

  • Diamond, William & Landvoigt, Tim & Sánchez, Germán Sánchez, 2025. "Printing away the mortgages: Fiscal inflation and the post-covid boom," Journal of Financial Economics, Elsevier, vol. 171(C).
    • Handle: RePEc:eee:jfinec:v:171:y:2025:i:c:s0304405x25000807
    DOI: 10.1016/j.jfineco.2025.104072
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