Inflation as a Fiscal Limit

Monetary Policy Surprise Shocks Under Different Fiscal Regimes: A Panel Analysis of the Euro Area

“…If the recession increases further the debt-to-GDP ratio and monetary tightening is not supported by agents' expectations of future fiscal adjustment which incorporate future inflation into the present, the worsening of fiscal imbalances leads to even higher inflationary pressures and prolonged economic stagnation. This vicious cycle is called "Fiscal Stagflation" (Bianchi and Melosi, 2022). Our empirical findings in the regime of High Debt-Low Sustainability are consistent with these theoretical predictions.…”

“…At the same time, the geopolitical crisis of 2022-2023 has triggered inflationary price dynamics. Some studies attribute inflation persistence not to the energy crisis but to fiscal and demand factors (Bianchi and Melosi, 2022). They see today's inflation as a result of the large pandemic fiscal packages, central banks' accommodative policies, and agents' expectations about the future conduct of government policy.…”

The Effects of Monetary Policy Surprises and Fiscal Sustainability Regimes in the Euro Area

“…In particular, if the recession increases the debt-to-GDP ratio and monetary tightening is not supported by agents' expectations of future fiscal adjustment, the worsening of fiscal imbalances leads to even higher inflationary pressures and prolonged economic stagnation. This vicious cycle is called "Fiscal Stagflation" (Bianchi and Melosi, 2022).…”

“…In addition, the geopolitical crisis of the past two years has triggered an inflationary dynamic that is still in place. Some studies attribute its persistence not to the energy crisis but to demand and fiscal factors (Bianchi and Melosi, 2022;Cochrane, 2022). In particular, they see today's inflation as a consequence of the large pandemic fiscal packages, central banks' accommodative monetary policies, in the context Quantitative Easing, and agents' expectations about the future conduct of government policy.…”