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Fiscal Monetary Services and Inflation

In this paper the author uses a Fisher ideal index to track the monetary services provided by marketable US government debt. To do so, he first develops the theory necessary to consider using such a statistical index number, shows how the value of these fiscal monetary services expand the fiscal capacity to borrow, and provides evidence that the monetary services are primarily safety services. The author then uses Jorda (2005) projections to estimate the impact of such monetary services on inflation. He finds that a one-percent increase in fiscal monetary services produces a positive and statistically significant inflationary response that peaks between four and five basis points and persists for ten months. Given that the average growth rate of the fiscal monetary services in his sample is 2.5 percent, the impact is also economically significant. Together, these results suggest that there is a monetary services channel to the fiscal theory of the price level.