“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
“Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
“There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“A full-throated defense of economic dynamism.” - The Wall Street Journal
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
Coverage of banks, credit creation, deposits, capital requirements, monetary transmission, and the changing role of financial intermediaries. The archive tracks how banking conditions affect businesses, households, markets, and financial stability.
AI Summary.Firm-level data indicate the share of Chinese non-financial firms' assets held by "zombie" companies — those whose operating earnings fall short of their interest expenses — rose from 5% to 16% between 2018 and 2024, with real estate highest at 40%, services at 17% and manufacturing at 11%.
J. Scott Davis and Brendan KellyFederal Reserve Bank of Dallas
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Btw 2018 and 2024, the share of assets of all Chinese non-financial firms held by “zombie firms” whose operating earnings fell short of interest expenses rose from 5% to 16%, reminiscent of 1990s Japan. The real estate sector’s zombie share reached 40%.
Is the share of Chinese firms' assets held by zombie companies rising?
Core argument: The share of assets held by zombie firms among Chinese non-financial firms rose from 5% to 16% between 2018 and 2024, with firms classified as zombies when EBITDA falls short of interest expense.
There is mounting evidence of “zombie lending” in China, banks rolling over bad loans to unprofitable firms and allowing the status quo to continue rather than recognize losses. In many ways the current experience in China mirrors that of Japan in the 1980s and 1990s. Using firm-level financial data for Chinese firms, we can calculate zombie shares for Chinese sectors. We classify a firm as a zombie in a given year if its EBITDA (earnings before interest, taxes, depreciation and amortization, also known as operating earnings) is less than its interest expense. That is, a firm is a zombie if it does not earn enough from operations to meet interest expenses. The firm would be insolvent if not for continued funding from banks. The share of assets for all Chinese non-financial firms held by zombie firms rose from 5% to 16% from 2018 to 2024. The real estate sector has by far the highest zombie share, rising from 6% to 40%, consistent with China’s extended property sector downturn. The zombie share in manufacturing has risen fairly rapidly from a low of 4% in 2020 to 11% in 2024. With a sustained decline in industrial profits, this share looks likely to continue growing. Yet, China’s services sector has a higher proportion of zombie firms, increasing over the past several years to 17% in 2024.
Takeaways by Macro Roundup® AI
The share of assets held by zombie firms among Chinese non-financial firms rose from 5% to 16% between 2018 and 2024, with firms classified as zombies when EBITDA falls short of interest expense.
China's real estate sector has by far the highest zombie share, rising from 6% to 40%, consistent with the country's extended property sector downturn.
Zombie shares reached 11% in Chinese manufacturing in 2024, up from a low of 4% in 2020, and 17% in services, with a sustained decline in industrial profits cited as grounds for further growth in the manufacturing share.
Related Articles:
Macro Outlook 2026: Sturdy Growth, Stagnant Jobs, Stable Prices— China's growth is forecast at 4.8%, above the 4.5% consensus, with robust manufacturing offset by a housing drag on output estimated at about 1.5 percentage points as property sales run 60% below peak. Strong manufacturing and weak domestic demand are projected to lift China's current account surplus toward 1% of global output.
China’s Economy: Rightsizing 2025, Looking Ahead to 2026— The authors argue China's official growth figures are inconsistent with ten consecutive quarters of deflation, estimating that real GDP is around 11% below official levels, with most of the adjustment in investment. That would imply a drop of roughly 9 percentage points in China's share of global investment, helping explain its export surge.
China Manufacturing Overcapacity Boosts Output, Stagnation Fears— Nearly 30% of Chinese industrial firms operate at a loss, up from around 20% before the pandemic. The loss-making share has grown faster in sectors with high asset growth, reaching 34% versus 28% in low-asset-growth sectors.
AI Summary.The six largest US banks by assets — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — added $600bn in combined market value to reach $2.37tn, spurred by a deregulation push and a revival in investment banking. Europe's six most valuable banks are worth about $1tn combined.
Joshua FranklinFinancial Times
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The market cap of the six largest American banks rose $600B in 2025 to $2.37T – more than double that of their European peers – as investors bet on deregulation, such as allowing higher leverage and less onerous Basel III Endgame rules.
Has deregulation boosted the market value of large US banks?
Core argument: The six largest US banks by assets added $600bn in market value in 2025, with combined market capitalisation rising to $2.37tn from $1.77tn at the end of last year, according to S&P Global data.
America’s six largest banks added $600bn in market value in 2025, spurred on by the Trump administration’s push to deregulate the industry and a revival in investment banking. The collective market capitalisation of the six biggest US banks by assets — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — rose to $2.37tn at the close of business on Tuesday, up from $1.77tn at the end of last year, according to data from S&P Global. The six most valuable European banks have a market capitalisation of just $1tn combined, highlighting the gap that has opened since the financial crisis between US banks and their European rivals. The US banks are on track to outperform the broader S&P 500 for the second year in a row.
Takeaways by Macro Roundup® AI
The six largest US banks by assets added $600bn in market value in 2025, with combined market capitalisation rising to $2.37tn from $1.77tn at the end of last year, according to S&P Global data.
Gains at JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley were spurred on by the Trump administration's push to deregulate the industry and a revival in investment banking.
The six most valuable European banks have a combined market capitalisation of $1tn, while the six biggest US banks are on track to outperform the broader S&P 500 for the second year in a row.
Related Articles:
Goosing Credit Supply— Faster loan growth at lightly regulated smaller banks, credit unions, and private credit compared with large banks suggests post-2008 rules that raised capital and liquid-asset requirements with bank size have constrained large-bank lending. With loan growth currently limited more by demand than supply, easing large-bank requirements may mainly shift existing loans toward large banks.
The Secular Decline of Bank Balance Sheet Lending— Traditional bank balance sheet lending has declined as a share of credit intermediation, with credit increasingly channeled through arms-length transactions such as securitization. A structural model attributes falling lending shares to lower securitization costs, savers' behavior driving bank balance sheet size, and implicit bank costs and subsidies shaping balance sheet composition.
Europe’s Financial Sector is a Drag— Europe's fragmented financial sector struggles to supply enough capital and liquidity to support European companies and economic growth, with the gap between US and European financial sectors widening since the 2008-2009 crisis. The total market value of European banks fell from $2.7tn to $1.4tn, while US bank market value rose from $1.6tn to $2.6tn.
AI Summary.Gold has overtaken the euro as a global reserve asset, with central bank gold holdings reaching 36,000 tons, near the mid-1960s peak of 38,000 tons, helped by a 30% rise in the gold price. The European Central Bank finds countries geopolitically close to China and Russia accumulated gold more than others.
Olaf Storbeck and Leslie HookFinancial Times
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Gold accounted for 20% of global official reserves in 2024, outstripping the euro’s 16%, and second only to the US dollar at 46%. The price has risen 27% this year to an historic nominal high of $3,500/troy ounce.
Has gold surpassed the euro as a global reserve asset?
Core argument: Central bank gold reserves rose to 36,000 tons in 2024, approaching the mid-1960s peak of 38,000 tons, with gold overtaking the euro as a global reserve asset, according to ECB figures.
Central bank gold reserves, which peaked at 38,000 tons in the mid-1960s, rose again to reach 36,000 tons in 2024, according to the latest ECB numbers. A 30% rise in the gold price last year was one factor behind the surge in gold’s share of global foreign reserves. Large buyers last year included India, China, Turkey and Poland, according to the World Gold Council. The central bank’s analysis showed that “countries that are geopolitically close to China and Russia” bulked up on gold more than others over the past three years. In recent years, central banks have also been trying to diversify away from the US dollar amid concerns about geopolitical instability and US debt levels. The de-dollarization trend accelerated, particularly among developing countries, after the Russian invasion of Ukraine, when the US targeted Russia’s access to financial markets. The ECB noted: “If history is any guide, further increases in the official demand for gold reserves may also support further growth in global gold supply.”
Takeaways by Macro Roundup® AI
Central bank gold reserves rose to 36,000 tons in 2024, approaching the mid-1960s peak of 38,000 tons, with gold overtaking the euro as a global reserve asset, according to ECB figures.
A 30% rise in the gold price last year was one factor behind the increase in gold's share of global foreign reserves, with India, China, Turkey and Poland among the large buyers, according to the World Gold Council.
The ECB's analysis showed countries geopolitically close to China and Russia bulked up on gold more than others over the past three years, with de-dollarization accelerating among developing countries after Russia's invasion of Ukraine and US moves against Russia's financial market access.
Related Articles:
Gold Rising— China appears to be shifting its reserve diversification toward gold, but its gold allocation remains well below that of other countries at odds with the United States, such as Russia and Turkey, which raised their gold holdings substantially. Gold held in domestic custody sits outside U.S. influence.
Rich Countries Plan to Buy More Gold Despite Record Price— A World Gold Council survey finds almost 60% of advanced-economy central banks expect gold's share of global reserves to rise over the next five years at the expense of the US dollar, up from 38% a year earlier. About 13% plan to increase their own gold holdings within a year, the highest share recorded in the survey.
Asia’s $7.5 Trillion Bet on US Assets Is Suddenly Unravelling— Asia's 11 largest economies have accumulated $7.5tn in US stocks and bonds, but their annual capital flows into the US fell to $68bn, equal to just 11% of their trade surpluses with the US. Their major currencies, including the yen and yuan, trade on average 57% below exchange rates adjusted for living-cost differences.
AI Summary.Banks provide a smaller share of corporate credit than before the financial crisis, with bank lending falling from about 27% of total non-financial corporate debt to about 20%.
Torsten SløkApollo
Date Posted:
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Torsten Sløk shows that banks are playing a smaller role as a provider of credit. Bank lending declined from ~27% of total non-financial corporate debt prior to the crisis to ~20% today.
Are banks providing a smaller share of corporate credit?
Core argument: Bank lending has fallen from roughly 27% of total non-financial corporate debt before the financial crisis to about 20% today, according to Torsten Sløk.
[Torsten Slok] will be giving a presentation on “The Growing Role of Private Credit” today at the Hoover Institution during a conference celebrating John Taylor and the Taylor role.
Takeaways by Macro Roundup® AI
Bank lending has fallen from roughly 27% of total non-financial corporate debt before the financial crisis to about 20% today, according to Torsten Sløk.
Torsten Sløk argues that banks are playing a smaller role as providers of credit.
Torsten Sløk is presenting "The Growing Role of Private Credit" at the Hoover Institution during a conference celebrating John Taylor and the Taylor rule.
Related Articles:
Has Private Credit Broken the High-Yield Spread Signal?— The high-yield bond market has stayed at about $1.4tn while private credit assets have grown to as much as $2tn, and the highest-rated BB portion of the high-yield index has risen from 41% to 51%. Private markets have shifted riskier borrowers out of high yield, making that index safer.
The Secular Decline of Bank Balance Sheet Lending— Traditional bank balance sheet lending has declined as a share of credit intermediation, with credit increasingly channeled through arms-length transactions such as securitization. A structural model attributes falling lending shares to lower securitization costs, savers' behavior driving bank balance sheet size, and implicit bank costs and subsidies shaping balance sheet composition.
Private Credit: Characteristics and Risks— Private credit loans are negotiated bilaterally outside traditional regulatory requirements and are illiquid because no secondary market exists, leaving investors expected to hold them to maturity or face steep losses if they need to exit. Scarce data on this growing form of nonbank lending makes assessing its risks difficult.
AI Summary.The authors present a framework in which temporary disruptions like banking crises and excessive debt, along with structural factors like demographic decline and rising inequality, can push natural interest rates below zero, and argue that a negative natural rate combined with interest rates stuck at zero is necessary for a liquidity trap.
Gauti Eggertsson and Sergey EgievNational Bureau of Economic Research
Date Posted:
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Database
.@GautiEggertsson and @SEgiev note the difficulty of achieving negative nominal rates and argue that big downturns have resulted from a negative natural real rate – driven either by a crisis or secular stagnation – combined with stubbornly low inflation.
What causes liquidity traps in major economic downturns?
Core argument: The paper argues that a negative natural interest rate and the zero lower bound are both necessary conditions for a liquidity trap, applying a single framework to the U.S. Great Depression, the U.S. Great Recession, and Japan's Long Recession.
This paper presents a unified framework to explain three major economic downturns: the U.S. Great Depression, the U.S. Great Recession, and Japan’s Long Recession. Temporary economic disruptions, such as banking crises and excessive debt accumulation, can drive natural interest rates into negative territory in the short term. At the same time, structural factors, including demographic decline and rising inequality, can depress natural interest rates over short and long horizons. A negative natural interest rate and the zero lower bound (ZLB) are necessary conditions for a liquidity trap. Credible monetary policy can counteract the adverse effects of short-run liquidity traps. Diminished monetary policy credibility or persistent negative natural rates may necessitate fiscal interventions. The framework sheds light on the macroeconomic challenges of low-interest-rate environments and underscores the central importance of policy regimes.
Takeaways by Macro Roundup® AI
The paper argues that a negative natural interest rate and the zero lower bound are both necessary conditions for a liquidity trap, applying a single framework to the U.S. Great Depression, the U.S. Great Recession, and Japan's Long Recession.
Temporary disruptions such as banking crises and excessive debt accumulation can push natural interest rates negative in the short run, while structural factors including demographic decline and rising inequality can depress them over short and long horizons.
Credible monetary policy can counteract short-run liquidity traps, but diminished monetary policy credibility or persistent negative natural rates may necessitate fiscal intervention, according to the framework.
Related Articles:
Liquidity Traps, Gobal and Local (Somewhat Wonkish)— Europe's weak domestic demand, reflected in core inflation of 0.6%, is exported globally through large current account surpluses, while low inflation interacting with the zero lower bound on interest rates keeps policy from reaching equilibrium. Liquidity traps can persist locally despite international capital mobility when domestic demand stays weak.
The Puzzling Persistence of Financial Crisis— Financial crises are costly, with average declines of 5.5% of real GDP and median fiscal costs of 16% of real GDP to resolve distressed banks. The authors identify four categories of causal factors: politically motivated risk subsidies such as government support for housing credit, shifts in investor risk preferences, investor learning, and fraud.
Frying Pans and Fiscal Policy— The US economy remained significantly depressed for roughly a decade after the financial crisis, a lost decade the author argues could have been avoided with different policies. The evidence offered is the post-Covid recovery, in which major federal spending programs helped the economy regain lost ground in just over three years.
AI Summary.A study of more than 37,000 US banks from 1865 to 2023 finds that most bank failures follow a gradual, multi-year deterioration in solvency, as credit losses erode income and capital before a run or a supervisory closure. The authors reject runs on otherwise solvent banks as a plausible cause for at least 80% of failures before deposit insurance.
Sergio Correia, Stephan Luck, and Emil VernerFederal Reserve Bank of New York
Date Posted:
A study covering most US commercial banks from 1865 – 2023 finds that 80% of pre-FDIC bank failures resulted from “rising asset losses” and “deteriorating solvency,” not mere bank runs.
Do bank failures result from gradual solvency deterioration rather than runs?
Core argument: Drawing on more than 37,000 U.S. banks from 1865 to 2023, the authors reject bank runs as a plausible cause of failure for at least 80% of pre-FDIC failures, concluding runs on otherwise solvent banks were not a common cause.
This paper studies failing banks using data on more than 37,000 banks from the United States spanning 1865-2023. Our findings suggest that most bank failures are the result of a deterioration of a bank’s solvency - [which] is typically gradual and takes place over several years. The realization of credit risk reduces income and erodes capital buffers. The erosion of a bank’s profitability and capitalization ultimately results either in a bank run or a supervisory decision to close the bank, the former being more common in the historical data. Both depositors and supervisors seem to be slow to react to information about fundamentals, making bank failures highly predictable. [Though] our empirical approach does not allow us to identify the exact cause of failure, our evidence allows us to reject bank runs as a plausible cause of bank failure for a robust majority of at least 80% of pre-FDIC failures. Hence bank runs on otherwise solvent banks are not a plausible common cause of bank failures for most bank failures in the history of the U.S.
Takeaways by Macro Roundup® AI
Drawing on more than 37,000 U.S. banks from 1865 to 2023, the authors reject bank runs as a plausible cause of failure for at least 80% of pre-FDIC failures, concluding runs on otherwise solvent banks were not a common cause.
Most bank failures follow a gradual deterioration of solvency over several years, as the realization of credit risk reduces income and erodes capital buffers before a bank run or a supervisory closure.
Depositors and supervisors appear slow to react to information about bank fundamentals, making bank failures highly predictable, with runs more common than supervisory closures in the historical data.
Related Articles:
Deposit Insurance, Uninsured Depositors, and Liquidity Risk During Panics— Commercial banks located near a post office that accepted federally insured deposits were more likely to close during the Great Depression, and this effect weakened sharply after deposit insurance was extended to commercial banks. The authors interpret this as a competitive liquidity effect arising from incomplete insurance coverage.
The Puzzling Persistence of Financial Crisis— Financial crises are costly, with average declines of 5.5% of real GDP and median fiscal costs of 16% of real GDP to resolve distressed banks. The authors identify four categories of causal factors: politically motivated risk subsidies such as government support for housing credit, shifts in investor risk preferences, investor learning, and fraud.
Credit Allocation and Macroeconomic Fluctuations— Credit expansions disproportionately channel credit to non-tradable sector firms and households, and the authors find that the sectoral allocation of credit predicts future GDP paths and the likelihood of systemic banking crises. Credit growth to non-tradable industries predicts boom-bust output patterns and elevated financial fragility, while credit to tradable industries is associated with higher future productivity growth.
AI Summary.The authors find that after banking and debt crises, both national saving and investment decline, but investment falls more and does not return to its pre-crisis share within three years, improving the current account balance. They suggest persistent credit constraints may explain the weak post-crisis investment.
Menzie Chinn and Hiro ItoNational Bureau of Economic Research
Date Posted:
@menzie_chinn and @hiroitopdx find that banking crises, currency crises and debt crises all move the current accounts of emerging market economies toward surplus, typically due to reductions in investment.
How do banking and debt crises affect saving, investment, and current accounts?
Core argument: Following a banking crisis, both national saving and investment fall, but investment keeps declining through one year after the crisis while saving recovers moderately, producing an improvement in the current account balance.
Figure 10 shows that when a banking crisis occurs, both national saving and investment fall, though while investment continues to fall until t0+1 [one year after the crisis], saving recovers moderately in t0+1, all of which lead to an improvement of the CAB. Although it recovers from t0+2 on, the investment ratio does not return to the pre-crisis level, hence contributing to the improving CAB. The underperformance of investment in the post-banking crisis period may be due to persistent credit constraints in the post-crisis period, such as that in many EMEs that went through banking crises during the Asian Financial Crisis. Like in the case of currency crises, the investment ratio falls significantly during and in the immediate aftermath of [a debt] crisis. The investment level starts recovering in t0+2, [but it] does not return to the pre-crisis level by t0+3. The CAB improves rapidly after the crisis because the decline in investment levels was greater than that of national saving
Takeaways by Macro Roundup® AI
Following a banking crisis, both national saving and investment fall, but investment keeps declining through one year after the crisis while saving recovers moderately, producing an improvement in the current account balance.
The investment ratio recovers from two years after a banking crisis but does not return to its pre-crisis level, contributing to the improving current account balance, a shortfall that may reflect persistent credit constraints such as those in emerging market economies after the Asian Financial Crisis.
After a debt crisis, the investment ratio falls significantly and does not return to its pre-crisis level by three years out, and the current account balance improves rapidly because the decline in investment was greater than that in national saving.
Related Articles:
Corporate Debt, Boom-Bust Cycles, and Financial Crises— Using a dataset on sectoral credit exposure for 115 economies, the authors find corporate debt accounts for two-thirds of credit expansion before financial crises and three-quarters of nonperforming loans during busts, and that corporate debt expansions predict crises similarly to household debt. Recoveries are slower after corporate debt booms.
Credit Allocation and Macroeconomic Fluctuations— Credit expansions disproportionately channel credit to non-tradable sector firms and households, and the authors find that the sectoral allocation of credit predicts future GDP paths and the likelihood of systemic banking crises. Credit growth to non-tradable industries predicts boom-bust output patterns and elevated financial fragility, while credit to tradable industries is associated with higher future productivity growth.
The Puzzling Persistence of Financial Crisis— Financial crises are costly, with average declines of 5.5% of real GDP and median fiscal costs of 16% of real GDP to resolve distressed banks. The authors identify four categories of causal factors: politically motivated risk subsidies such as government support for housing credit, shifts in investor risk preferences, investor learning, and fraud.
AI Summary.When governments insulate taxpayers rather than bondholders from unfunded spending shocks, government bond yields rise as debt is marked to market, shifting the risk to bondholders — a "risky debt" regime the authors argue better fits recent experience. In that regime, large-scale central bank asset purchases give government bonds temporary price support at a net loss to taxpayers.
Roberto Gomez-Cram, Howard Kung, and Hanno LustigFederal Reserve Bank of Kansas City
Date Posted:
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.@HannoLustig and @rgomezcram argue the pandemic was a period of “fiscal dominance” in which bondholders insulated taxpayers from increased spending by absorbing capital losses. From March 2020 to March 2022, the government’s real debt fell by 10%.
Who bears the risk of unfunded government spending, taxpayers or bondholders?
Core argument: When governments and central banks insulate taxpayers rather than bondholders from spending shocks, bond yields rise as unfunded fiscal expansions mark government debt to market, shifting risk onto bondholders — a risky debt regime the authors find fits recent experience.
Governments and central banks can protect either taxpayers or bondholders from government spending shocks. When they choose to insulate taxpayers, government bond yields increase in response to unfunded fiscal expansions as the government debt is marked to market. The risks of unfunded spending shocks are then borne by bondholders. This risky debt regime is a better fit for recent experience. High-frequency evidence from the COVID episode links U.S. In Figure 12, the cumulative change in the Treasury portfolio valuation on large negative proposal days [in red] exhibits a smooth downward trend over the extended sample, implying that the effects are attributed to a consistent flow of fiscal news rather than a few large observations. Between March 2020 and March 2022, the effect is much larger, as shown by the significant steepening of the red line. During COVID the overall value changes shown by the blue line were primarily driven by fiscal news. [Finally], in this risky debt regime, large-scale asset purchases in response to large government spending provide temporary price support to government bonds, a net loss for taxpayers.
Takeaways by Macro Roundup® AI
When governments and central banks insulate taxpayers rather than bondholders from spending shocks, bond yields rise as unfunded fiscal expansions mark government debt to market, shifting risk onto bondholders — a risky debt regime the authors find fits recent experience.
Cumulative Treasury portfolio valuation changes on large negative fiscal-proposal days trend smoothly downward across the sample, implying a consistent flow of fiscal news rather than a few large observations, with marked steepening between March 2020 and March 2022.
In the risky debt regime, large-scale asset purchases made in response to large government spending give government bonds temporary price support and represent a net loss for taxpayers.
Related Articles:
Fiscal Narratives for US Inflation— Fiscal theory attributes the deflation of the deep recession to a fall in real interest rates that lowered real interest costs on government debt, an effect that outweighed large deficits. The predicted deflation spiral and the hyperinflation forecast from quantitative easing both failed to materialize.
Fiscal Influences on Inflation in OECD Countries, 2020-2022— Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.
Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements— Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.
