Prof. John H. Cochrane presented his incisive analysis of inflation and government debt in a distinguished lecture at the University of Bern. His starting point was the fiscal theory of the price level, according to which inflation is not only a consequence of monetary policy, but also – and primarily – a result of a lack of fiscal credibility. If governments consistently spend more than they can cover through taxes today or in the future, markets lose confidence and prices rise.
He emphasised that the recent wave of inflation in the United States was primarily due to fiscal stimulus during the coronavirus pandemic. Central banks could respond to such stimulus measures by raising interest rates, but without a clear prospect of fiscal consolidation, such inflation control measures would remain incomplete. In the long term, price stability is closely linked to sustainable debt policy, whereby government debt is not a bad thing per se, but rather a useful instrument that must be used correctly.
During the question and answer session, Cochrane addressed questions on the eurozone, US debt, the instability of banks and the impact on Switzerland.
His conclusion: price stability is as much a task for fiscal policy as it is for monetary policy, and future inflation risks depend crucially on how government debt is managed.
