). Fiscal dominance has always been a pressing problem as it can contribute to inflation and macroeconomic instability, and … and inflation …

responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers …. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively … controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below …

expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap. …

. The risk of future regime shifts has encompassing effects on equilibrium. Inflation is systematically higher than it would … stability. This inflation bias is increasing in the real value of government debt. Regime-switching probabilities are not … interest rate sufficiently moderately when inflation increases. Lower fiscal dominance risk, in turn, mitigates the inflation …