Monetary and fiscal policies in times of large debt: Unity is strength

Arbeitspapier

We build and estimate a novel TANK model with partially unfunded debt to study whether the record high debt-to-GDP ratio threatens US inflation stability. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. The central bank accommodates unfunded fiscal shocks, causing persistent movements in inflation and real interest rates, leading to a fiscal theory of trend inflation. Fiscal trend inflation accounts for the bulk of inflation dynamics. The current situation is in line with historical experience. Unfunded shocks sustain the recovery and cause a temporary inflation increase that counteracts deationary non-policy shocks.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Danmarks Nationalbank Working Papers ; No. 159R

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; Fiscal Policy ; Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
• Subject: Monetary policy ; Public finances ; fiscal policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bianchi, Francesco ; Faccini, Renato ; Melosi, Leonardo
• Event: Veröffentlichung
• (who): Danmarks Nationalbank
• (where): Copenhagen
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/264897
• Last update: 10.03.2025, 11:44 AM CET