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The Fiscal Roots of Inflation

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  • John H. Cochrane

Abstract

Unexpected inflation devalues nominal government bonds. It must therefore correspond to a decline in expected future surpluses, or a rise in their discount rates, so that the real value of debt equals the present value of surpluses. I measure each component using a vector autoregression, via responses to inflation, recession, surplus and discount rate shocks. Discount rates account for much inflation variation, for the cyclical pattern of inflation, and why persistent deficits often do not cause inflation. Long-term debt is important. In response to a fiscal shock, smooth inflation slowly devalues outstanding long-termbonds.

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  • John H. Cochrane, 2019. "The Fiscal Roots of Inflation," NBER Working Papers 25811, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25811
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    References listed on IDEAS

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    Cited by:

    1. Lamia Bazzaoui & Jun Nagayasu, 2021. "Is Inflation Fiscally Determined?," Sustainability, MDPI, vol. 13(20), pages 1-26, October.
    2. Jiang, Zhengyang & Lustig, Hanno & Van Nieuwerburgh, Stijn & Xiaolan, Mindy Z., 2020. "Manufacturing Risk-Free Government Debt," Research Papers 3882, Stanford University, Graduate School of Business.
    3. Elenev, Vadim & Landvoigt, Tim & Shultz, Patrick & van Nieuwerburgh, Stijn, 2021. "Can Monetary Policy Create Fiscal Capacity?," CEPR Discussion Papers 16414, C.E.P.R. Discussion Papers.
    4. Marco Bassetto & Gherardo Gennaro Caracciolo, 2021. "Monetary/Fiscal Interactions with Forty Budget Constraints," Working Papers 788, Federal Reserve Bank of Minneapolis.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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