The Fiscal Roots of Inflation

69 Pages Posted: 25 May 2019 Last revised: 9 Jun 2021

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 28, 2019

Abstract

Unexpected inflation devalues nominal government bonds. It must therefore correspond to a decline in expected future surpluses, or a rise in their discount rates, so that the real value of debt equals the present value of surpluses. I measure each component using a vector autoregression, via responses to inflation, recession, surplus and discount rate shocks. Discount rates account for much inflation variation, for the cyclical pattern of inflation, and why persistent deficits often do not cause inflation. Long-term debt is important. In response to a fiscal shock, smooth inflation slowly devalues outstanding long-term bonds.

Keywords: inflation, fiscal theory of the price level, monetary policy

JEL Classification: E5

Suggested Citation

Cochrane, John H., The Fiscal Roots of Inflation (April 28, 2019). Available at SSRN: https://ssrn.com/abstract=3379370 or http://dx.doi.org/10.2139/ssrn.3379370

John H. Cochrane (Contact Author)

Hoover Institution ( email )

Stanford, CA 94305-6010
United States
6507236708 (Phone)

HOME PAGE: http://www.johnhcochrane.com/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
102
Abstract Views
1,109
Rank
392,645
PlumX Metrics