Debt, Inflation and the Shape of the Global Pandemic Recovery

The pandemic crisis introduced an unprecedented supply-side shock that was global in scope. Despite historically high levels of prior sovereign debt and low bond yields, macro policy responses included monetised fiscal expansions of extraordinary magnitude. Conventional theory suggests that the combination of supply contractions with monetised fiscal expansions is inflationary, yet central bank discourse at the time expressed little concern about inflation. Our theoretical analysis confirms the presence of inflation forces, likely offset by continuing pessimism shocks and the management of inflation expectations. Our empirical assessment of the long relationships between supply shocks, fiscal and monetary expansions and inflation in key OECD countries reveals that monetised fiscal expansions have tended to precede inflation, both over a century and more strongly following signature episodes like WWII.