In HANK models, fiscal deficits drive aggregate demand and thus inflation because households are non-Ricardian; in the Fiscal Theory of the Price Level (FTPL), they instead do so via equilibrium selection. Because of this difference, the mapping from deficits to inflation in HANK is robust to active monetary policy and free of the controversies surrounding the FTPL. Despite this difference, a benchmark HANK model with sufficiently slow fiscal adjustment predicts just as much inflation as the FTPL. This is true even in the simplest FTPL scenario, in which deficits are financed entirely by inflation and debt erosion. In practice, however, unfunded deficits are likely to trigger a persistent boom in real economic activity and thus the tax base, substituting for debt erosion. In our quantitative explorations, this reduces the inflationary effects of unfunded deficits by about half relative to that simple FTPL arithmetic.
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- Acknowledgements & Disclosure
- We thank Marco Bassetto and Morten Ravn for valuable conference discussions. For helpful comments and suggestions, we thank Manuel Amador, Francesco Bianchi, Larry Christiano, John Cochrane, Jordí Gali, Joao Guerreiro, Joel Flynn, Mikhail Golosov, Greg Kaplan, Hanno Lustig, Emi Nakamura, Matthew Rognlie, Jón Steinsson, Ludwig Straub, Iván Werning, Mike Woodford, and seminar participants at: the ECB, the Expectations, Prices and Monetary Policy Conference in Peru, the Federal Reserve Banks of Atlanta, Philadelphia, and Minneapolis, the Hydra Workshop on Dynamic Macroeconomics, the NBER Summer Institute (Monetary Economics), SITE (Fiscal Sustainability), Stanford, the 12th Annual CIGS conference on Macroeconomic Theory and Policy, UC Berkeley, UCL, and the University of Chicago. Chen Lian thanks the Alfred P. Sloan Foundation for financial support, and Christian Wolf acknowledges that this material is based upon work supported by the NSF under Grant #2314736. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w33102
- Pages
- 73
- Published in
- United States of America
Table of Contents
- NBER WORKING PAPER SERIES 1
- DEFICITS AND INFLATION HANK MEETS FTPL 1
- George-Marios Angeletos Chen Lian Christian K. Wolf 1
- Working Paper 33102 httpwww.nber.orgpapersw33102 1
- NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 November 2024 1
- Deficits and Inflation HANK meets FTPL George-Marios Angeletos Chen Lian and Christian K. Wolf NBER Working Paper No. 33102 November 2024 JEL No. E3 E6 2
- George-Marios Angeletos Department of Economics E52-530 MIT 77 Massachusetts Avenue Cambridge MA 02139 and NBER angeletosnorthwestern.edu 2
- Chen Lian Department of Economics University of California Berkeley Evans Hall Berkeley CA 94720 and NBER chenlianberkeley.edu 2
- Christian K. Wolf MIT Department of Economics The Morris and Sophie Chang Building 50 Memorial Drive Cambridge MA 02139 and NBER ckwolfmit.edu 2
- 1 Introduction 3
- 2 Environment 8
- 2.1 Aggregate demand 8
- 2.2 Aggregate supply 9
- 2.3 Fiscal policy 10
- 2.4 Monetary policy 11
- 2.5 Equilibrium definition 11
- 3 A review of RANK-FTPL 12
- 3.1 Equilibrium characterization 12
- 3.2 How much 15
- 3.3 How 16
- 4 HANK meets FTPL 18
- 4.1 Classical non-Ricardian effects in HANK 18
- 4.2 HANK meets FTPL with fixed real rates 19
- 4.3 HANK meets FTPL with interest rate feedback 24
- 4.4 The robustness of HANK 25
- 5 Extensions 29
- 5.1 Long-term government debt 29
- 5.2 Heterogeneous distributional incidence 31
- 5.3 Hybrid NKPC 33
- 6 Quantitative analysis 34
- 6.1 Extended HANK model and calibration 35
- 6.2 Benchmark specification 37
- 6.3 Model variants 38
- 6.4 Application to post-covid inflation dynamics 40
- 7 Conclusion 42
- References 42
- Appendices for 47
- Deficits and Inflation HANK meets FTPL 47
- A Supplementary theoretical details and extensions 48
- A.1 Environment 48
- A.2 Long-term government debt and interest rate feedback 50
- B Additional results for quantitative analysis 52
- B.1 Further model details 52
- B.2 Deficits and inflation with real rate response 52
- B.3 Perfectly anticipated covid stimulus 53
- C Proofs 55
- C.1 Proof of Proposition 1 55
- C.2 Proof of Proposition 2 56
- C.3 Proof of Proposition 3 58
- C.4 Proof of Corollary 1 58
- C.5 Proof of Proposition 4 59
- C.6 Proof of Proposition 5 59
- C.7 Proof of Proposition 6 62
- C.8 Proof of Proposition 7 64
- C.9 Proof of Corollary 2 65
- C.10 Proof of Proposition 8 66
- C.11 Proof of Proposition 9 67
- C.12 Proof of Proposition 10 69
- C.13 Proof of Proposition A.1 71
