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The Effects of the Saving and Banking Glut on the U.S. Economy

In: NBER International Seminar on Macroeconomics 2013

  • Alejandro Justiniano
  • Giorgio E. Primiceri
  • Andrea Tambalotti

This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the public debt, matter for inflation. As a result, fiscal policy constrains the efficacy of monetary policy. Heavily indebted economies with debt maturity structures observed in many countries require aggressive monetary policy to anchor inflation expectations. The model predicts that the Great Moderation period would not have been so moderate had fiscal policy been characterized by a scale and composition of public debt now witnessed in some advanced economies in the aftermath of the 2007-09 global recession.

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This chapter was published in:
  • Richard Clarida & Gita Gopinath & Lucrezia Reichlin, 2014. "NBER International Seminar on Macroeconomics 2013," NBER Books, National Bureau of Economic Research, Inc, number fran13-1.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 13152.
    Handle: RePEc:nbr:nberch:13152
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