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- Title
Does fiscal stance affect inflation expectations? Evidence for European economies.
- Authors
Łyziak, Tomasz; Mackiewicz-Łyziak, Joanna
- Abstract
According to the fiscal theory of the price level, in a non-Ricardian regime, high public debt should lead to a price-level increase so as to fulfill intertemporal government budget constraint. Forward-looking agents should anticipate this rise by pushing up their inflation expectations. This study tests the above hypothesis by analyzing the impact of fiscal sustainability on the formation of inflation expectations by private-sector agents – consumers and professional forecasters – in European countries. In the study, we estimate models of inflation expectations, and we include public debt among the explanatory variables. The novelty of this study lies in our analysis of whether the relationship between public debt and inflation expectations is affected by the degree to which fiscal policy is sustainable in European economies. We find that fiscal stance influences the inflation expectations of consumers and professional forecasters. Contrary to intuition, the reaction of consensus economic forecasts to public debt in countries with sustainable fiscal policies seems stronger than in economies with less disciplined fiscal policies. This may suggest that fiscal authorities are constrained by the way in which private-sector agents form their expectations, conducting more responsible fiscal policy in countries where the reaction of economic agents to fiscal variables is stronger. • We test the impact of fiscal sustainability on inflation expectation formation. • Fiscal stance influences inflation expectations of European consumers and experts. • Expert expectations react more to debt in countries with disciplined fiscal policy. • Fiscal authorities seem constrained (disciplined) by the formation of expectations.
- Subjects
PRICE inflation; PUBLIC debts; FISCAL policy; MICROECONOMICS; PRICE levels
- Publication
Economic Analysis & Policy, 2020, Vol 68, p296
- ISSN
0313-5926
- Publication type
Article
- DOI
10.1016/j.eap.2020.09.010