Abstract: Contrary to popular belief, inflation-indexed government debt can boost inflation in response to deficit shocks, conditional on a lack of sufficient future fiscal backing. I formalize this insight through a state-of-the-art calibrated HANK model with multiple asset types, showing that the annual inflationary effect of a 1% deficit-to-GDP shock increases by 0.5 percentage points when 30% of the government debt stock is indexed to inflation, as is the case in the United Kingdom. Inflation-indexed debt makes the price level partially backward-looking through the government debt valuation equation, thereby causing additional inflationary pressure. Empirical evidence from a large, narratively identified fiscal deficit shock supports this finding, which has additional implications for the distinction between 'fiscally-led' mechanisms and 'HANK-type' mechanisms surpassing Ricardian equivalence.

Abstract: Fiscal deficits in a financial hegemon transmit to inflation and exchange rates abroad. Using market-value data on U.K. and U.S. sovereign debt over 1975-2024, we recover model-consistent fiscal deficit innovations an document two empirical regularities: U.S. deficit shocks appreciate the U.K. real exchange rate on impact and raise U.K. consumer prices persistently, with a transmitted magnitude roughly half that of own-country U.K.\ deficit shocks. We rationalise these facts in a quantitative continuous-time two-country model in which hegemon bonds carry a convenience yield. A hegemon fiscal expansion tightens the foreign intertemporal budget constraint through two channels: a wealth effect on foreign holders of hegemon debt, and a discount-rate spillover that revalues foreign sovereign liabilities. We call this mechanism fiscal contagion and show that it operates across a broad range of monetary-fiscal policy mixes. An estimated version of the model attributes roughly two percentage points of cumulative U.K. inflation since 2021 to spillovers from U.S. fiscal policy.

Abstract: The origins of the post-2020 inflation are the subject of much debate. One argument has its roots in an unfunded expansion of debt-driven government spending, in what has been labelled fiscal dominance or a fiscally-led policy mix. We show that the risks of such fiscal dominance depend on the degree to which government debt is indexed to inflation. Inflation-indexation has a nonlinear effect on the existence of saddlepath equilibria, and can amplify the inflationary effects of deficit shocks when policy is fiscally led unless monetary and fiscal policy enact coordinated policies that limit, or even invert, the windfall gains borne by households holding indexed debt. Empirical evidence links inflation-indexed debt to low central bank independence, a high probability of suspending fiscal rules, and a larger reaction of inflation to fiscal shocks.

Abstract: This paper develops a macroeconomic model of supply chains, in which demand, captured by explicit order placement, need not be fulfilled concurrently. Our model gives rise to precautionary inventory accumulation behaviour and the amplification of shocks on supply chains, endogenously giving rise to the 'bullwhip effect' known from the Operations Research literature under additional conditions. The basic model is capable of approximating the relative dynamics of the (inventory-)sales volatility on the upper end of the supply chain relative to the lower end of the supply chain in response to shocks on the production and delivery technology. In addition, the model highlights the importance of price adjustment to ensure intertemporal market clearing when order backlogs become too costly. The model mechanism is highly dependent on demand-side policies, which matter significantly for the extent of the bullwhip effect observable in equilibrium.

Abstract: This paper utilizes the unique dynamics of fiscal budgeting in countries with a large hydrocarbon sector to estimate fiscal multipliers. The main identifying assumption rests on the idea that exogenously identified global hydrocarbon demand shocks can be considered plausible instruments for the fiscal space of countries in which that space is significantly dictated by hydrocarbon income, with such shocks being uncorrelated with non-hydrocarbon output at the same time. Using a local projection-instrumental variables (LP-IV) framework, the paper estimates that short-run fiscal expenditure multipliers to be in the ballpark of 0.1-0.4. In addition, we find that multipliers are at the upper end of this interval during recessions, indicating that fiscal policy in the Gulf countries is particularly effective during economic downturns.