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Fiscal Inflation With Incomplete Information

Author

Listed:
  • Junjie Guo

    (School of Finance, Central University of Finance and Economics, Beijing, China)

  • Zhao Han
  • Abhiprerna Smit

Abstract

We quantify fiscal inflation through the lens of incomplete information between funded and unfunded fiscal shocks. Information friction naturally breaks the Ricardian equivalence for deficits to be inflationary. We identify the unfunded shock through a pair of interconnected short-term debt and inflation targets that vary over time. Qualitatively, incomplete information alters the effects of both monetary and fiscal shocks on inflation. Quantitatively, in response to an unfunded shock, the inflation responses are approximately 40%-64% lower compared to the case of full information. Both fiscal stimulus and supply shocks contribute significantly to COVID inflation. An unfunded tax cut can increase output and reduce debt burden, at the cost of higher lingering inflation.

Suggested Citation

  • Junjie Guo & Zhao Han & Abhiprerna Smit, 2026. "Fiscal Inflation With Incomplete Information," Working Papers 176, Economics Department, William & Mary.
    • Handle: RePEc:cwm:wpaper:176
    DOI: 10.2139/ssrn.5555120
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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