Inflation Dynamics: The Role of Public Debt and Policy Regimes
67 Pages Posted: 2 Jun 2012 Last revised: 16 Jul 2015
Date Written: April 29, 2014
In a passive monetary and active fiscal policy regime, changes in the value of public debt generate wealth effects on households. Then, in contrast to the active monetary and passive fiscal policy regime, inflation moves oppositely from the inflation target and a stronger reaction of interest rates to inflation increases the response of inflation to shocks. Moreover, a higher level of public debt increases the response of inflation while a weaker reaction of taxes to debt decreases the response of inflation to shocks. In a passive monetary and passive fiscal policy regime, both monetary and fiscal policy parameters affect inflation.
Keywords: Inflation target, Inflation response, Public debt, Monetary and fiscal policy regimes, Monetary and fiscal policy stances
JEL Classification: E31, E52, E63
Suggested Citation: Suggested Citation