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Lack of Trust and Fiscal Dominance: Evidence from a Firm Survey Experiment

Author

Listed:
  • Bianchi, Francesco
  • Faccini, Renato
  • Melosi, Leonardo
  • Wehrhöfer, Nils

Abstract

We study how debt news shapes firms' inflation expectations in a monetary union. In an active-control experiment, German firms receive optimistic or pessimistic projections of France, Italy, and Spain's debt-to-GDP ratios. Pessimistic news raises debt beliefs and increases one- and three-year inflation expectations, with no detectable effect at five years. The response is driven by low-trust firms and by firms expecting relatively low ECB policy rates. A salient German debt-financed fiscal shock generates no comparable response. Within a Fisherian framework, the evidence suggests that debt news becomes inflationary when firms perceive incomplete fiscal backing and expect monetary accommodation.

Suggested Citation

  • Bianchi, Francesco & Faccini, Renato & Melosi, Leonardo & Wehrhöfer, Nils, 2026. "Lack of Trust and Fiscal Dominance: Evidence from a Firm Survey Experiment," CEPR Discussion Papers 21595, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21595
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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