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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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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
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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  1. Francesco Bianchi, 2011. "Monetary/Fiscal Policy Mix and Agents' Beliefs," 2011 Meeting Papers 156, Society for Economic Dynamics.
  2. Kriwoluzky, Alexander & Kliem, Martin & Sarferaz, Samad, 2013. "On the low-frequency relationship between public deficits and inflation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80000, Verein für Socialpolitik / German Economic Association.
  3. Eric M. Leeper & Todd B. Walker, 2011. "Perceptions and misperceptions of fiscal inflation," BIS Working Papers 364, Bank for International Settlements.
  4. Woong Yong Park & Jae Won Lee & Saroj Bhattarai, 2012. "Policy Regimes, Policy Shifts, and U.S. Business Cycles," 2012 Meeting Papers 287, Society for Economic Dynamics.
  5. Jesús Fernández-Villaverde & Pablo A. Guerrón-Quintana & Keith Kuester & Juan Rubio-Ramírez, 2011. "Fiscal Volatility Shocks and Economic Activity," NBER Working Papers 17317, National Bureau of Economic Research, Inc.
  6. 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.
  7. André Kurmann & Christopher Otrok, 2012. "News shocks and the slope of the term structure of interest rates," Working Papers 2012-011, Federal Reserve Bank of St. Louis.
  8. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
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