Do Enlarged Fiscal Deficits Cause inflation: The Historical Record

Do Enlarged Fiscal Deficits Cause inflation: The Historical Record
(co-authored by Mickey Levy)


The current global Covid-19 pandemic has led to massive government responses across the world, including lockdowns of normal activities and expansive fiscal and monetary policies to stabilize their economies and head off financial stresses. In the U.S. and UK and other advanced nations, expansive fiscal programs raised budget deficits and pushed debt-to-GDP ratios to the highest levels since World War II. Central banks lowered interest rates to zero, introduced extensive lender of last resort and credit facilities and engaged in large-scale asset purchases of government bonds. (Put in US and UK data here). The low interest rates and central bank purchases of government bonds lowered debt service costs and facilitated the dramatic fiscal expansions. In many respects, the initial response combined aspects of the policy response in several overlapping crisis scenarios in the past: World Wars I and II, the Great Depression, and the Global Financial Crisis (Bordo, Levin and Levy 2020). These earlier episodes of induced fiscal and monetary expansion in the 1930s and the World Wars led to rising price levels and inflation. In this paper we survey the historical record for over two centuries on the connection between expansionary fiscal policy and inflation and find that fiscal deficits that are financed by monetary expansion tend to be inflationary. However, some research finds that money finance is not required for an inflationary outcome.

Date and time: 
Tuesday 24 November 2020, 16:00 - 17:30
Michael D. Bordo (Rutgers University)
Entrance fee: