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Journal Article
On the Mechanics of Fiscal Inflations
The goal of this paper is twofold. First, we wish to better explain the relationship between Sargent and Wallace’s (1981) unpleasant monetarist arithmetic, the closely connected fiscal theory of the price level (FTPL), and the monetarist view of inflation. Second, we discuss how the recent inflationary episode has contributed to redistributing real resources from holders of government debt to the public purse. In particular, financial prices before the onset of the COVID pandemic suggest that investors viewed an inflationary shock such as the one we experienced as extremely unlikely, so the ...
Working Paper
Monetary/Fiscal Interactions with Forty Budget Constraints
It is well known that monetary and fiscal policy are connected by a common budget constraint. In this paper, we study how this manifests itself in the context of the Eurozone, where that connection links the European Central Bank, the 19 national central banks, the Treasuries of 19 countries, and the European Union. Our goal is twofold. First, we wish to clarify how seigniorage flows from the monetary authority to the budget of each country. Second, we seek to answer the question of how the taxpayers of each country are affected by a default of one of the participants to the union. In ...
Briefing
Analyzing Fiscal Policy Matters More Than Ever: The Fiscal Theory of the Price Level and Inflation
he fiscal theory of the price level is a theoretical framework for understanding how monetary and fiscal policies interact in the determination of macroeconomic outcomes. The key insight is that future fiscal conditions determine the current price level, whereby monetary and fiscal policy are connected by the government budget constraint.
Report
A Monetary-Fiscal Theory of Sudden Inflations
This paper posits an information channel as the explanation for sudden inflations. Consumers saving via nominal government bonds face a choice whether to acquire costly information about future government surpluses. They trade off the cost of acquiring information about the surpluses that back bond repayment against the benefit of a more informed saving decision. Through the information channel, small changes in the economic environment can trigger large responses in consumers' behavior and prices. This setting explains why there can be long stretches of time during which government surpluses ...