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Inflation Targeting under Fiscal Fragility

Aloísio Barboza de Araújo et al.

American Economic Journal: Macroeconomics2026https://doi.org/10.1257/mac.20230291article
AJG 4ABDC A*
Weight
0.50

Abstract

We propose a model to study an inflation-targeting regime under a high government debt burden. We assume that an altruistic policymaker chooses debt issuance, inflation, and public expenditure, while private agents dislike inflation and finance the government. We show that equilibrium inflation depends on debt level: (i) on-target when debt is low; (ii) above the target when debt is high; (iii) either above or on-target in between, a zone that we named fiscal fragility. Equilibrium inflation also depends on the target level: A higher target may improve welfare by preventing fiscal fragility and reducing debt-rollover costs. (JEL E31, E52, E62, E63, H63, O11, O23)

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https://doi.org/https://doi.org/10.1257/mac.20230291

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@article{aloísio2026,
  title        = {{Inflation Targeting under Fiscal Fragility}},
  author       = {Aloísio Barboza de Araújo et al.},
  journal      = {American Economic Journal: Macroeconomics},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1257/mac.20230291},
}

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Inflation Targeting under Fiscal Fragility

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Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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