Munich Personal RePEc Archive

Credit Risk and Fiscal Inflation

Li, Bing and Pei, Pei and Tan, Fei (2018): Credit Risk and Fiscal Inflation.

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Is inflation ‘always and everywhere a monetary phenomenon’ or is it fundamentally a fiscal phenomenon? This article augments a standard monetary model to incorporate fiscal details and credit market frictions. These ingredients allow for both interpretations of the inflation process in a financially constrained environment. We find that adding financial frictions to the model generates important identifying restrictions on the observed pattern between inflation and measures of financial and fiscal stress, to the extent that it can overturn existing findings about which monetary-fiscal policy regime produced the pre-crisis U.S. data.

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