The fiscal theory states that inflation adjusts so that the real value of
government debt equals the present value of real primary surpluses. Monetary
policy remains important. The central bank can set an interest rate target,
which determines the path of expected inflation, while news about the present
value of surpluses drives unexpected inflation. I use fiscal theory to
interpret historical episodes, including the rise and fall of inflation in
the 1970s and 1980s, the long quiet zero bound of the 2010s, and the
reemergence of inflation in 2021, as well as to analyze the gold standard,
currency pegs, the ends of hyperinflations, currency crashes, and the success
of inflation targets. Going forward, fiscal theory warns that inflation will
have to be tamed by coordinated monetary and fiscal policy.
