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monetary-policy institutional intelligence, quantitative benchmarks, primary regulatory filings, and market structure analysis from QuantCalc Tools. A Federal Reserve FEDS working paper by Oliver Pfäuti and Edson Wu finds that raising public debt from 100% to 175% of GDP increases inflation volatility by approximately 20%, driven by firms reallocating rational attention toward fiscal shocks rather than cost shocks.
Curated by Elena Rostova, FRM, CQF (FRM, Certificate in Quantitative Finance (CQF)) · Fact-checked by QuantCalc Tools Institutional Review Board
A Federal Reserve FEDS working paper by Oliver Pfäuti and Edson Wu finds that raising public debt from 100% to 175% of GDP increases inflation volatility by approximately 20%, driven by firms reallocating rational attention toward fiscal shocks rather than cost shocks.
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An increase in debt from 100% to 175% of GDP raises inflation volatility by about 20% (Source: Oliver Pfäuti and Edson Wu, Federal Reserve FEDS Working Paper, https://www.federalreserve.gov/econres/feds/inattentive-price-setting-and-inflation-under-fiscal-policy-uncertainty.htm). The main driver is firms reallocating attention toward fiscal shocks rather than marginal-cost signals.
Higher debt raises steady-state taxes, which simultaneously reduces the profit stakes of mispricing (dampening attention demand) and makes desired prices more sensitive to tax fluctuations (amplifying attention demand). These two opposing forces produce a U-shaped curve: at intermediate debt levels the dampening effect dominates, while at high debt levels approaching 175% of GDP the sensitivity effect dominates, pushing inflation volatility higher.
Using euro-area firm-level expectations data, Pfäuti and Wu document that the passthrough of expected input-cost growth into expected selling-price growth rises systematically with a country's debt-to-GDP ratio. This cross-country pattern is consistent with the model's prediction that higher sovereign debt increases the informational weight firms assign to fiscal signals when forming price expectations (Source: Federal Reserve FEDS Working Paper).
