Do Deficits Cause Inflation? A High Frequency Narrative Approach
This paper measures the causal effect of deficits on inflation using a “high frequency narrative approach”. We identify an event that released news about the 2021 deficits in the United States—the Georgia Senate election runoff. We calculate the size of the shock using new narrative data from investment banks. We then study the high frequency response of inflation forecasts from asset prices, in order to separate deficits from other factors affecting inflation. We estimate an “inflation multiplier” of 0.18% price level growth over two years, for a 1% deficit-to-GDP shock. Our estimate implies that the 2021 deficits caused around 30% of the 2021-22 inflation—meaning deficits were important but not the only cause. A standard heterogeneous agent New Keynesian model quantitatively matches the size and dynamics inflation multiplier
Date: 24 January 2025, 13:15
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Seminar Room A
Speaker: Joe Hazell (London School of Economics)
Organising department: Department of Economics
Part of: Macroeconomics Seminar
Booking required?: Not required
Audience: Members of the University only
Editor: Edward Clark