Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/296961 
Year of Publication: 
2023
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 195
Publisher: 
Danmarks Nationalbank, Copenhagen
Abstract: 
We develop a new class of general equilibrium models with partially unfunded debt to propose a fiscal theory of persistent inflation. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. However, the central bank accommodates unfunded fiscal shocks, causing persistent movements in inflation, output, and real interest rates. In an estimated quantitative model, fiscal inflation accounts for the bulk of inflation dynamics. In the aftermath of the pandemic, unfunded fiscal shocks sustain the recovery, but also cause a persistent increase in inflation. The model is able to predict the inflationary effects of the ARPA fiscal stimulus out of sample and using real time data.
Subjects: 
Unfunded fiscal spending
persistent inflation
large public debt
inflation risk
shock-specific rule
JEL: 
E50
E62
E30
Document Type: 
Working Paper

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