Inflation volatility, government debts, and the fiscal theory of the price level

Inflation responses to aggregate demand shocks, endowment shocks, and money demand shocks are examined in the policy regime in which the fiscal theory of the price level is valid, using a simple endowment economy model. An interesting finding is that, in the presence of money demand and endowment shocks, a larger steady state real value of (nominal) government debt (bonds) lowers volatility of the inflation rate.