The Fiscal Roots Of Inflation

Thursday, February 6, 2020
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istock

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 via a vector autoregression, in response to inflation, recession, surplus and discount rate shocks. Discount rates, rather than deficits, account for most inflation variation. Smooth inflation that slowly devalues outstanding long-term bonds is an important mechanism.

Read the paper: The Fiscal Roots of Inflation