Fiscal Policy and Inflation: Pondering the Imponderables
نویسنده
چکیده
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 dollars 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. * Indiana University, Department of Economics, 105 Wylie Hall, Bloomington, IN 47401; tel. (812) 855-9157; fax (812) 855-3736; [email protected]. I thank Dave Gordon, Susan Monaco, Jennifer Roush, Jack Treynor, and Peter Williamson for helpful suggestions.
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