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Household Beliefs about Fiscal Dominance

Author

Listed:
  • Andrade, Philippe
  • Gautier, Erwan
  • Mengus, Eric
  • Moench, Emanuel
  • Schmidt, Tobias

Abstract

We provide direct micro evidence that households link public debt and inflation in a way consistent with a fiscal dominance logic. We design a randomized controlled trial to identify how fiscal news lead individuals to revise their debt-to-GDP and inflation expectations. We also provide a way to elicit individuals’ views about the fiscal space. Consistent with fiscal dominance, we find that individuals who consider that fiscal resources are stretched also associate larger debt-to-GDP with higher inflation. By contrast, individuals who think there is fiscal space do not make that connection. We study how these results matter for monetary pol- icy by introducing a New Keynesian model in which agents have heterogeneous beliefs about the fiscal space. Such beliefs imply a policy tradeoff for the central bank: Agents who expect fiscal dominance in the future exert upward pressures on inflation. Even an active central bank partially tolerates these price pressures due to the real costs of completely stabilizing prices.

Suggested Citation

  • Andrade, Philippe & Gautier, Erwan & Mengus, Eric & Moench, Emanuel & Schmidt, Tobias, 2025. "Household Beliefs about Fiscal Dominance," CEPR Discussion Papers 19862, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19862
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • 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
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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