IDEAS home Printed from https://ideas.repec.org/p/hhs/rbnkwp/0273.html
   My bibliography  Save this paper

Identifying Fiscal Inflation

Author

Listed:
  • De Graeve, Ferre

    () (Monetary Policy Department, Central Bank of Sweden)

  • Queijo von Heideken, Virginia

    () (Monetary Policy Department, Central Bank of Sweden)

Abstract

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.

Suggested Citation

  • De Graeve, Ferre & Queijo von Heideken, Virginia, 2013. "Identifying Fiscal Inflation," Working Paper Series 273, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0273
    as

    Download full text from publisher

    File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2013/rap_wp273_130919.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stephanie Schmitt‐Grohé & Martín Uribe, 2012. "What's News in Business Cycles," Econometrica, Econometric Society, vol. 80(6), pages 2733-2764, November.
    2. Saroj Bhattarai & Jae Won Lee & Woong Yong Park, 2016. "Policy Regimes, Policy Shifts, and U.S. Business Cycles," The Review of Economics and Statistics, MIT Press, vol. 98(5), pages 968-983, December.
    3. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    4. Martin Kliem & Alexander Kriwoluzky & Samad Sarferaz, 2016. "On the Low‐Frequency Relationship Between Public Deficits and Inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(3), pages 566-583, April.
    5. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
    6. Andr? Kurmann & Christopher Otrok, 2013. "News Shocks and the Slope of the Term Structure of Interest Rates," American Economic Review, American Economic Association, vol. 103(6), pages 2612-2632, October.
    7. Olivier J. Blanchard & Jean-Paul L'Huillier & Guido Lorenzoni, 2013. "News, Noise, and Fluctuations: An Empirical Exploration," American Economic Review, American Economic Association, vol. 103(7), pages 3045-3070, December.
    8. Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2011. "Inflation and the fiscal limit," European Economic Review, Elsevier, vol. 55(1), pages 31-47, January.
    9. 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 3352-3384, November.
    10. De Graeve, Ferre & Emiris, Marina & Wouters, Raf, 2009. "A structural decomposition of the US yield curve," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 545-559, May.
    11. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 5(Fall).
    12. Eric M. Leeper & Todd B. Walker, 2012. "Perceptions and Misperceptions of Fiscal Inflation," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 255-299, National Bureau of Economic Research, Inc.
    13. Shu-Chun Susan Yang, 2007. "A Chronology Of Postwar U.S. Federal Income Tax Policy," CAEPR Working Papers 2007-021, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    14. Jeffrey R. Campbell & Charles L. Evans & Jonas D.M. Fisher & Alejandro Justiniano, 2012. "Macroeconomic Effects of Federal Reserve Forward Guidance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 1-80.
    15. Eric M. Leeper & Todd B. Walker & Shu‐Chun Susan Yang, 2013. "Fiscal Foresight and Information Flows," Econometrica, Econometric Society, vol. 81(3), pages 1115-1145, May.
    16. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    17. Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2013. "Pricing the term structure with linear regressions," Journal of Financial Economics, Elsevier, vol. 110(1), pages 110-138.
    18. Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, vol. 55(1), pages 2-30, January.
    19. Cochrane, John H, 2001. "Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 69(1), pages 69-116, January.
    20. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Francesco Bianchi & Cosmin Ilut, 2017. "Monetary/Fiscal Policy Mix and Agent's Beliefs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 113-139, October.
    2. Hanana Khan & Maran Marimuthu & Fong-Woon Lai, 2020. "Fiscal Deficit and Its Less Inflationary Sources of Borrowing with the Moderating Role of Political Instability: Evidence from Malaysia," Sustainability, MDPI, Open Access Journal, vol. 12(1), pages 1-1, January.
    3. Philipp Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.),Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    2. Thorsten Drautzburg, 2020. "A narrative approach to a fiscal DSGE model," Quantitative Economics, Econometric Society, vol. 11(2), pages 801-837, May.
    3. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.
    4. Born, Benjamin & Peter, Alexandra & Pfeifer, Johannes, 2013. "Fiscal news and macroeconomic volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2582-2601.
    5. Leeper, E.M. & Leith, C., 2016. "Understanding Inflation as a Joint Monetary–Fiscal Phenomenon," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.),Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2305-2415, Elsevier.
    6. Francesco Bianchi & Leonardo Melosi, 2017. "Escaping the Great Recession," American Economic Review, American Economic Association, vol. 107(4), pages 1030-1058, April.
    7. Hürtgen, Patrick, 2014. "Consumer misperceptions, uncertain fundamentals, and the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 279-292.
    8. Berndt, Antje & Yeltekin, Şevin, 2015. "Monetary policy, bond returns and debt dynamics," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 119-136.
    9. Fujiwara, Ippei & Waki, Yuichiro, 2020. "Fiscal forward guidance: A case for selective transparency," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 236-248.
    10. Leeper, Eric M. & Plante, Michael & Traum, Nora, 2010. "Dynamics of fiscal financing in the United States," Journal of Econometrics, Elsevier, vol. 156(2), pages 304-321, June.
    11. Lindé, J. & Smets, F. & Wouters, R., 2016. "Challenges for Central Banks’ Macro Models," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.),Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2185-2262, Elsevier.
    12. Francesco Bianchi & Cosmin Ilut, 2017. "Monetary/Fiscal Policy Mix and Agent's Beliefs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 113-139, October.
    13. Harrison, Richard, 2015. "Estimating the effects of forward guidance in rational expectations models," European Economic Review, Elsevier, vol. 79(C), pages 196-213.
    14. Campbell, Jeffrey R. & Ferroni, Filippo & Fisher, Jonas D.M. & Melosi, Leonardo, 2019. "The limits of forward guidance," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 118-134.
    15. Nadav Ben Zeev, 2019. "Is There A Single Shock That Drives The Majority Of Business Cycle Fluctuations?," Working Papers 1906, Ben-Gurion University of the Negev, Department of Economics.
    16. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    17. Gomes, Sandra & Iskrev, Nikolay & Mendicino, Caterina, 2017. "Monetary policy shocks: We got news!," Journal of Economic Dynamics and Control, Elsevier, vol. 74(C), pages 108-128.
    18. Sims, Eric, 2016. "What׳s news in News? A cautionary note on using a variance decomposition to assess the quantitative importance of news shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 41-60.
    19. Ryan Chahrour & Kyle Jurado, 2018. "News or Noise? The Missing Link," American Economic Review, American Economic Association, vol. 108(7), pages 1702-1736, July.
    20. Byrne, Joseph P. & Cao, Shuo & Korobilis, Dimitris, 2019. "Decomposing global yield curve co-movement," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 500-513.

    More about this item

    Keywords

    Fiscal policy; inflation; news;
    All these keywords.

    JEL classification:

    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:hhs:rbnkwp:0273. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lena Löfgren). General contact details of provider: http://edirc.repec.org/data/rbgovse.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.