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Fiscal requirements for price stability when households are not Ricardian

Author

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  • Dupraz, Stéphane
  • Picco, Anna Rogantini

Abstract

Are restrictions on fiscal policy necessary for monetary policy to be able to deliver price stability? When households are Ricardian, the net present value of future fiscal surpluses needs to equate the real value of government debt absent inflation. We show that when households are not Ricardian, fiscal requirements still exist but take the very different form of a limit on the debt-to-GDP ratio. The debt-to-GDP limit captures the idea that public debt cannot be so large that the wealth effect of public debt on aggregate spending can no longer be counter-balanced by interest rate hikes, however large. To implement price stability when the debt-to-GDP requirement is satisfied, monetary policy must respond to the level of public debt, not just to the inflation it creates. JEL Classification: E31, E62

Suggested Citation

  • Dupraz, Stéphane & Picco, Anna Rogantini, 2025. "Fiscal requirements for price stability when households are not Ricardian," Working Paper Series 3038, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253038
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    More about this item

    Keywords

    monetary-fiscal interactions; non-Ricardian households; price stability;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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