Sweden's Riksbank has published a Staff Memo by Magnus Jonsson and Anders Vredin analysing how monetary and fiscal policy interact when Ricardian equivalence does not hold, using a New Keynesian framework to trace implications for inflation, output and real government debt. The analysis finds that when equivalence breaks because some households are liquidity constrained or because policy operates under fiscal dominance, shock transmission differs from a Ricardian benchmark. Supply shocks generate a stronger inflation response but a weaker output response, while demand shocks generate larger swings in real activity. Real government debt becomes more volatile with hand-to-mouth households but less volatile under fiscal dominance. Distortionary taxes provide an additional channel: under monetary dominance, consumption tax increases tend to reduce core inflation and are generally more contractionary for output than equally sized labour-income tax increases, while labour-income tax rises intensify inflationary pressures. Under fiscal dominance, tax increases lower inflation by strengthening expected primary surpluses, and a policy-rate increase can be inflationary as higher debt-servicing costs are absorbed via price-level adjustment. The Riksbank notes that Staff Memos are staff publications without policy conclusions and reflect the authors’ views rather than the Riksbank’s official position.
Riksbank 2026-04-20
Sweden's Riksbank publishes staff memo on monetary–fiscal interactions when Ricardian equivalence fails
The Riksbank has published a Staff Memo analysing monetary–fiscal policy interactions in a New Keynesian framework without Ricardian equivalence, including liquidity-constrained households and fiscal dominance. The study finds altered shock transmission, with stronger inflation but weaker output responses to supply shocks, larger real-activity swings from demand shocks, differing volatility of real government debt, and distinct inflation and output effects from consumption versus labour-income tax changes under monetary versus fiscal dominance. Staff Memos express the authors’ views and not the Riksbank’s official policy stance.