Monetary-Fiscal Interactions by John H. Cochrane published by NBER (9/2025).
Inflation surged in 2021-2023 from a classic fiscal shock: money and debt that financed huge spending, without a plan for repayment. Neither money nor supply shocks offer a coherent alternative explanation. Inflation eased, with no recession, once the fiscal shock was over. Higher interest rates could have brought inflation down earlier, but could not have stopped it. Going forward, higher interest rates will raise debt service costs, and thus perversely raise inflation unless fiscal policy can tighten. High debt and structural deficits also mean that the US may lose the fiscal space to borrow in the next crisis.
