Public debt and household inflation expectations

Abstract

We use randomized controlled trials in the US, UK, and Brazil to examine the causal effect of public debt news on household inflation expectations. People tend to underestimate public debt levels and increase inflation expectations when informed about the correct levels. The extent of the revisions is proportional to the size of the information surprise. Confidence in the central bank considerably reduces the sensitivity of inflation expectations to public debt, while confidence in fiscal authorities plays a more limited role. We also show that people associate high public debt with stagflationary effects but not with a greater risk of monetary finance.