Fiscal Monetary Services and Inflation

Abstract

In this paper I use a Fisher ideal index to track the monetary services provided by marketable US government debt. To do so, I first develop the theory necessary to consider using such a statistical index number, show how the value of these fiscal monetary services expand the fiscal capacity to borrow, and provide evidence that the monetary services are primarily safety services. I then use Jord`a (2005) projections to estimate the impact of such monetary services on inflation. I find that a one-percent increase in fiscal monetary services produces a positive and statistically-significant inflationary response that peaks between four and five basis points and persists for eight months. Given that the average growth rate of the fiscal monetary services in my sample is 2.5 percent, the impact is also economically significant. Together, these results suggest that there is a monetary services channel to the fiscal theory of the price level.