The Fiscal Roots of Inflation
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 via a vector autoregression, in response to inflation, recession, surplus and discount rate shocks. Discount rates, rather than deficits, account for most inflation variation. Smooth inflation that slowly devalues outstanding long-term bonds is an important mechanism.
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Document Object Identifier (DOI): 10.3386/w25811