Do enlarged fiscal deficits cause inflation? The historical record

摘要

We survey the historical record for two centuries on the connection between expansionary fiscal policy and inflation. The relationship holds in wartime when fiscally stressed governments resorted to the inflation tax. In two peacetime episodes in the early twentieth century, bond-financed fiscal deficits, unbacked by future taxes, may have contributed to inflation. Fiscal influence on monetary policy was important in the Great Inflation 1965-1983. Expansionary monetary and fiscal policy did not lead to inflation in the Global Financial Crisis of 2007-08 but, by contrast, the fiscal and monetary response to the COVID-19 pandemic may involve risks of fiscal dominance and future inflation.