IDEAS home Printed from https://ideas.repec.org/p/ebg/heccah/1603.html

Household Beliefs about Fiscal Dominance

Author

Listed:
  • Mengus, Eric

    (HEC Paris - Economics & Decision Sciences)

  • Mönch, Emanuel

    (Frankfurt School of Finance & Management; Centre for Economic Policy Research (CEPR))

  • Gautier, Erwan

    (Bank of France Research Center)

  • Andrade, Philippe

    (Federal Reserve Bank of Boston)

Abstract

We study beliefs about fiscal dominance in a survey of German households. We first use a randomized controlled trial to identify how fiscal news impact individual debt-to-GDP and inflation expectations. We document that the link between debt and inflation crucially depends on individuals' views about the fiscal space. News leading individuals to expect higher debt-to-GDP ratios make them more likely to revise upward their inflation expectations. These average effects are due to individuals who think that fiscal resources are more stretched than others. In contrast, individuals who think there is fiscal space do not associate debt with inflation. We then rationalize these results in a New Keynesian model where agents have heterogeneous beliefs about the fiscal space. We show that the heterogeneity of beliefs implies a policy trade-off for the central bank. Agents who expect fiscal dominance in the future exert upward pressure on inflation. An active central bank may choose to partially tolerate this higher inflation due to the real costs of completely stabilizing prices.

Suggested Citation

  • Mengus, Eric & Mönch, Emanuel & Gautier, Erwan & Andrade, Philippe, 2025. "Household Beliefs about Fiscal Dominance," HEC Research Papers Series 1603, HEC Paris, revised 25 Mar 2025.
    • Handle: RePEc:ebg:heccah:1603
    DOI: 10.2139/ssrn.5192275
    as

    Download full text from publisher

    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5192275
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.2139/ssrn.5192275?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • 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
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebg:heccah:1603. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Antoine Haldemann The email address of this maintainer does not seem to be valid anymore. Please ask Antoine Haldemann to update the entry or send us the correct address (email available below). General contact details of provider: https://edirc.repec.org/data/hecpafr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.