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


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: or

John H. Cochrane (Contact Author)

Hoover Institution ( email )

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United States
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National Bureau of Economic Research (NBER)

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