The Fiscal Transmission Mechanism of Inflation
The link between money creation and inflation has been theoretically demonstrated, but different inflation responses to Federal Reserve activity after the Great Recession and COVID recession showed the incomplete nature of the theory. We model a “fiscal transmission mechanism” whereby Federal Reserv...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Pompea College of Business
2023-05-01
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| Series: | American Business Review |
| Subjects: | |
| Online Access: | https://digitalcommons.newhaven.edu/americanbusinessreview/vol26/iss1/9/ |
| _version_ | 1827916081824530432 |
|---|---|
| author | Robert Gmeiner Sven Larson |
| author_facet | Robert Gmeiner Sven Larson |
| author_sort | Robert Gmeiner |
| collection | DOAJ |
| description | The link between money creation and inflation has been theoretically demonstrated, but different inflation responses to Federal Reserve activity after the Great Recession and COVID recession showed the incomplete nature of the theory. We model a “fiscal transmission mechanism” whereby Federal Reserve purchases of Treasury securities lead to inflation as new dollars flow through fiscal deficits into the economy. In our model, other Federal Reserve activity generally lacks inflationary effects. Using a nonstructural vector autoregression approach, we test for the presence of this mechanism and offer near perfect predictions of the 2022 inflation rate using a time series extending back half a century. We explain the fiscal transmission mechanism and the reasons why other Federal Reserve activity lacks the same effects, and we propose an emphasis on controlling the money supply by limiting Federal Reserve purchases of Treasury securities as a better way to control inflation than setting an interest rate target. |
| first_indexed | 2024-03-13T03:08:53Z |
| format | Article |
| id | doaj.art-79269365a8674933874c31e762dcbe64 |
| institution | Directory Open Access Journal |
| issn | 2689-8810 |
| language | English |
| last_indexed | 2024-03-13T03:08:53Z |
| publishDate | 2023-05-01 |
| publisher | Pompea College of Business |
| record_format | Article |
| series | American Business Review |
| spelling | doaj.art-79269365a8674933874c31e762dcbe642023-06-26T18:10:32ZengPompea College of BusinessAmerican Business Review2689-88102023-05-012618020210.37625/abr.26.1.180-202The Fiscal Transmission Mechanism of InflationRobert Gmeiner0Sven Larson1Methodist UniversityCompact for AmericaThe link between money creation and inflation has been theoretically demonstrated, but different inflation responses to Federal Reserve activity after the Great Recession and COVID recession showed the incomplete nature of the theory. We model a “fiscal transmission mechanism” whereby Federal Reserve purchases of Treasury securities lead to inflation as new dollars flow through fiscal deficits into the economy. In our model, other Federal Reserve activity generally lacks inflationary effects. Using a nonstructural vector autoregression approach, we test for the presence of this mechanism and offer near perfect predictions of the 2022 inflation rate using a time series extending back half a century. We explain the fiscal transmission mechanism and the reasons why other Federal Reserve activity lacks the same effects, and we propose an emphasis on controlling the money supply by limiting Federal Reserve purchases of Treasury securities as a better way to control inflation than setting an interest rate target.https://digitalcommons.newhaven.edu/americanbusinessreview/vol26/iss1/9/inflationmoney supplymonetary policybudget deficits |
| spellingShingle | Robert Gmeiner Sven Larson The Fiscal Transmission Mechanism of Inflation American Business Review inflation money supply monetary policy budget deficits |
| title | The Fiscal Transmission Mechanism of Inflation |
| title_full | The Fiscal Transmission Mechanism of Inflation |
| title_fullStr | The Fiscal Transmission Mechanism of Inflation |
| title_full_unstemmed | The Fiscal Transmission Mechanism of Inflation |
| title_short | The Fiscal Transmission Mechanism of Inflation |
| title_sort | fiscal transmission mechanism of inflation |
| topic | inflation money supply monetary policy budget deficits |
| url | https://digitalcommons.newhaven.edu/americanbusinessreview/vol26/iss1/9/ |
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