Working Paper: NBER ID: w18877
Authors: Eric M. Leeper
Abstract: Every economy faces a "fiscal limit" that delivers the maximum government debt-GDP ratio that can be sustained without appreciable risk of default or higher inflation. But governments in advanced economies issue substantial nominal debt and nominal debt is a commitment to repay in nominal units. When such economies are approaching their fiscal limits, debt can be devalued through higher current and future inflation rates. The paper develops a simple bond market supply-demand apparatus to explain how fiscal policy can be a source of inflation, while monetary policy merely determines the timing of inflation.
Keywords: Fiscal limits; Monetary policy; Inflation; Government debt
JEL Codes: E31; E52; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government debt levels (H63) | inflation (E31) |
| fiscal limits (E62) | inflation (E31) |
| fiscal policy (E62) | inflation (E31) |
| monetary policy (E52) | timing of inflation (E31) |