Working Paper: NBER ID: w9506
Authors: Eric M. Leeper
Abstract: An asset-pricing perspective on inflation reveals that it depends on current and expected monetary and fiscal policies. There are three ways to carry $1 today into the future: money, bonds, and real assets. That dollar's purchasing power varies inversely with the price level. Expected money growth, tax rates, and government spending directly impinge on these expected rates of return of these assets, and determine the price level and the inflation rate. The paper considers a tax reduction that is financed by new government debt. It examines how alternative responses of current and future policies to the tax cut can imply very different outcomes for inflation.
Keywords: No keywords provided
JEL Codes: E310; E620; E630
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax reduction financed by new government debt (H69) | inflation (E31) |
| expected future policies (E60) | inflation (E31) |
| tax reduction financed by new government debt (H69) | expected future policies (E60) |
| expected future policies (E60) | rates of return on assets (G32) |
| rates of return on assets (G32) | current savings and investment decisions (E21) |
| current savings and investment decisions (E21) | inflation (E31) |
| uncertainty regarding future tax rates or government spending (H69) | inflation (E31) |