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We study equilibria in a heterogeneous-agent incomplete-market economy with nominal government debt and flexible prices. Unlike in representative agent economies, steady-state equilibria exist when the government runs persistent deficits, provided that the level of deficits is not too large. In these equilibria, the real interest rate is below the growth rate of the economy. We quantify the maximum sustainable deficit for the US and show that it is lower under more redistributive tax and transfer systems. With constant primary deficits, there exist two steady-states, and the price level and inflation are not uniquely determined. We describe alternative policy settings that deliver uniqueness. We conduct quantitative experiments to illustrate how redistribution and precautionary saving amplify price level increases in response to fiscal helicopter drops, deficit expansions, and loose monetary policy. We show that rising primary deficits can account for a decline in the long-run real interest rate, leading to higher inflation for any given monetary policy. Our work highlights the role of household heterogeneity and market incompleteness in determining inflation.

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We measure the heterogeneous welfare effects of the recent inflation surge across households in the Euro Area. A simple framework illustrating the numerous channels of the transmission mechanism of surprise inflation to household welfare guides our empirical exercise. By combining micro data and aggregate time series, we conclude that: (i) country-level average welfare costs--expressed as a share of 2021-22 income--were larger than a typical recession, and heterogeneous, e.g., 3% in France and 8% in Italy; (ii) this inflation episode resembles an age-dependent tax, with the elderly losing up to 20%, and roughly half of the 25-44 year-old winning; (iii) losses were quite uniform across consumption quantiles because rigid rents served as a hedge for the poor; (iv) nominal net positions are the key driver of heterogeneity across-households; (v) the rise in energy prices generated vast variation in individual-level inflation rates, but unconventional fiscal policies were critical in shielding the most vulnerable households