Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93583
Authors: 
Eusepi, Stefano
Preston, Bruce
Year of Publication: 
2013
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 649
Abstract: 
This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the public debt, matter for inflation. As a result, fiscal policy constrains the efficacy of monetary policy. Heavily indebted economies with debt maturity structures observed in many countries require aggressive monetary policy to anchor inflation expectations. The model predicts that the Great Moderation period would not have been so moderate had fiscal policy been characterized by a scale and composition of public debt now witnessed in some advanced economies in the aftermath of the 2007-09 global recession.
Subjects: 
debt management policy
maturity structure
monetary policy
expectations stabilization
Great Moderation
JEL: 
E32
D83
D84
Document Type: 
Working Paper

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