10.17889/E109090V1
Eusepi, Stefano
Preston, Bruce
Replication data for: Fiscal Foundations of Inflation: Imperfect Knowledge
ICPSR Inter-university Consortium for Political and Social Research
2018
10.1257/aer.20131461
10.1257/aer.20131461
1
This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. Because imperfect knowledge breaks Ricardian equivalence, the scale and composition of the public debt matter for inflation. High and moderate duration debt generates wealth effects on consumption demand that impairs the intertemporal substitution channel of monetary policy: aggressive monetary policy is required to anchor inflation expectations. Counterfactual experiments conducted in an estimated model reveal that the US economy would have been substantially more volatile over the Great Inflation and Great Moderation periods if US debt levels had been those observed in Italy or Japan.