Abstract
We develop a novel high-frequency measure of the expected fiscal reaction to monetary policy and show that it implies diminished monetary policy effectiveness. Using changes around FOMC announcements in the breakeven tax rate implied by taxable Treasuries and tax-exempt municipal bond ETFs, we find that monetary tightening raises expected future taxes. This reaction has roughly halved since COVID and no longer varies with government indebtedness. We calibrate a HANK model to interpret these findings. Because all households are non-Ricardian, the interaction between the fiscal reaction and the stock of debt shapes the response of inflation to monetary policy. The weaker post-COVID reaction makes monetary tightening about half as disinflationary as it was pre-COVID, and projected higher debt levels will further erode tightening's impact.
Please note that the seminar is by invitation only.
The seminar will be held in room 1204 (12th floor) at Eilert Sundts Hus. The address is Moltke Moes vei 31.