The Fiscal Transmission Mechanism of Inflation

The link between money creation and inflation has been theoretically demonstrated, but different responses to Federal Reserve activity after the Great Recession COVID recession showed incomplete nature of theory. We model a “fiscal transmission mechanism” whereby purchases Treasury securities lead as new dollars flow through fiscal deficits into economy. In our model, other generally lacks inflationary effects. Using nonstructural vector autoregression approach, we test for presence this mechanism offer near perfect predictions 2022 rate using time series extending back half century. explain reasons why same effects, propose an emphasis on controlling supply by limiting better way control than setting interest target.