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On the Mechanics of Fiscal Inflations

Author

Listed:
  • Marco Bassetto
  • Luca Benzoni
  • Jason Hall

Abstract

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 magnitude of this redistribution caught them by surprise.

Suggested Citation

  • Marco Bassetto & Luca Benzoni & Jason Hall, 2024. "On the Mechanics of Fiscal Inflations," Working Paper Series WP 2024-15, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:98723
    DOI: 10.21033/wp-2024-15
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    Keywords

    Macroeconomics; Monetary Economics; Financial Economics;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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