Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264897 
Year of Publication: 
2021
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 159R
Publisher: 
Danmarks Nationalbank, Copenhagen
Abstract: 
We build and estimate a novel TANK model with partially unfunded debt to study whether the record high debt-to-GDP ratio threatens US inflation stability. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. The central bank accommodates unfunded fiscal shocks, causing persistent movements in inflation and real interest rates, leading to a fiscal theory of trend inflation. Fiscal trend inflation accounts for the bulk of inflation dynamics. The current situation is in line with historical experience. Unfunded shocks sustain the recovery and cause a temporary inflation increase that counteracts deationary non-policy shocks.
Subjects: 
Monetary policy
Public finances
fiscal policy
JEL: 
E50
E62
E30
Document Type: 
Working Paper

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