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Identifying Fiscal Inflation

  • De Graeve, Ferre

    ()

    (Monetary Policy Department, Central Bank of Sweden)

  • Queijo von Heideken, Virginia

    ()

    (Monetary Policy Department, Central Bank of Sweden)

Fiscal theorists warn about the risk of future inflation as a consequence of current fiscal imbalances in the US. Because actual inflation remains historically low and data on inflation expectations do not corroborate such risks, warnings for fiscal inflation are often ignored in policy and academic circles. This paper shows that a canonical NK- DSGE model enables identifying an anticipated component of inflation expectations that is closely related to fiscal policy. Estimation results suggest that fiscal inflation concerns have induced a 1.6%-points increase in long-run inflation since 2001. The model also rationalizes why data on inflation expectations do not reveal such concerns outright.

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File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2013/rap_wp273_130919.pdf
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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 273.

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Length: 31 pages
Date of creation: 01 Sep 2013
Date of revision:
Handle: RePEc:hhs:rbnkwp:0273
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Sveriges Riksbank, SE-103 37 Stockholm, Sweden

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Web page: http://www.riksbank.com/
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  17. Jesús Fernández-Villaverde & Pablo Guerrón-Quintana & Keith Kuester & Juan Rubio-Ramírez, 2015. "Fiscal Volatility Shocks and Economic Activity," American Economic Review, American Economic Association, vol. 105(11), pages 3352-84, November.
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