How much inflation can fiscal policy create? Separating household heterogeneity and liquidity

Economics > General Economics [Submitted on 1 Mar 2024 (v1), last revised 16 Jun 2026 (this version, v3)] Title:How much inflation can fiscal policy create? Separating household heterogeneity and liquidity View PDF HTML (experimental)Abstract:A key determinant of monetary-fiscal interactions in Heterogeneous Agent New Keynesian (HANK) models is the liquidity value of public debt and its effect on interest rate dynamics. Yet, while household heterogeneity shapes this channel, it doesn't pin it down. In both analytically tractable and quantitative 2-asset HANK models, asset market assumptions unrelated to standard micro moments give rise to disparate implications of fiscal policy for inflation, as well as model determinacy and fiscal self-financing. To address this issue, I propose a simple model extension and discipline it with macro-level evidence on the relationship between public debt and treasury returns. This moderates the inflationary impact of public debt dynamics but does not render it negligible. After large fiscal shocks, it can still generate persistently elevated ``last mile'' inflation. Submission history From: Matthias Hänsel [view email][v1] Fri, 1 Mar 2024 11:57:29 UTC (3,691 KB) [v2] Thu, 7 Nov 2024 11:12:00 UTC (1,446 KB) [v3] Tue, 16 Jun 2026 14:32:29 UTC (1,314 KB) Current browse context: econ.GN References & Citations Loading... Bibliographic and Citation Tools Bibliographic Explorer (What is the Explorer?) Connected Papers (What is Connected Papers?) Litmaps (What is Litmaps?) scite Smart Citations (What are Smart Citations?) Code, Data and Media Associated with this Article alphaXiv (What is alphaXiv?) CatalyzeX Code Finder for Papers (What is CatalyzeX?) DagsHub (What is DagsHub?) Gotit.pub (What is GotitPub?) Hugging Face (What is Huggingface?) ScienceCast (What is ScienceCast?) Demos Recommenders and Search Tools Influence Flower (What are Influence Flowers?) CORE Recommender (What is CORE?) arXivLabs: experimental projects with community collaborators arXivLabs is a framework that allows collaborators to develop and share new arXiv features directly on our website. Both individuals and organizations that work with arXivLabs have embraced and accepted our values of openness, community, excellence, and user data privacy. arXiv is committed to these values and only works with partners that adhere to them. Have an idea for a project that will add value for arXiv's community? Learn more about arXivLabs.