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- Title
Fiscal Foundations of Inflation: Imperfect Knowledge.
- Authors
Eusepi, Stefano; Preston, Bruce
- Abstract
This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. Because imperfect knowledge breaks Ricardian equivalence, the scale and composition of the public debt matter for inflation. High and moderate duration debt generates wealth effects on consumption demand that impairs the intertemporal substitution channel of monetary policy: aggressive monetary policy is required to anchor inflation expectations. Counterfactual experiments conducted in an estimated model reveal that the US economy would have been substantially more volatile over the Great Inflation and Great Moderation periods if US debt levels had been those observed in Italy or Japan. (JEL D84, E31, E32, E52, E62, H63)
- Subjects
UNITED States; PRICE inflation; RICARDIAN equivalence theorem; MONETARY policy; CONSUMPTION (Economics); UNITED States economy; PUBLIC debts
- Publication
American Economic Review, 2018, Vol 108, Issue 9, p2551
- ISSN
0002-8282
- Publication type
Article
- DOI
10.1257/aer.20131461