A1185
Title: State-dependency of fiscal price puzzle
Authors: Naoto Soma - Yokohama National University (Japan) [presenting]
Abstract: The aim is to examine the state-dependent nature of the fiscal price puzzle, where expansionary fiscal policy doesn't increase prices as traditional theory predicts. Extending a prior study, a state-dependent local projection model is used to analyze price responses to fiscal shocks during economic expansions and recessions. The findings show significant state dependence: during expansions, government spending increases do not raise prices, and total factor productivity (TFP) rises, which is consistent with the puzzle. However, during recessions, spending increases cause inflation without TFP growth. This suggests that the channel proposed by the aforementioned study may only apply during expansions, while recessionary effects align with conventional theory.
