In this paper we use a simple two-period model in which government's preferences are private information to show that a tough monetary stance may help in bringing inflation expectations to lower levels even if the fiscal side of the economy is not in good shape. True, a restrictive monetary policy leads to higher debt levels and potentially to higher expected inflation (fiscal dominance effect). But, on the other hand, it also allows a tough-type government to separate itself from a lax-type one in the eyes of the public (signaling effect). A feature of the model is that inflation and inherited debt are not necessarily positive correlated for all levels of debt. Concretely, the high debt levels Lula's administration inherited from FHC´s term in office (the so-called "damned heritage") may have helped the former to signal to markets its degree of inflation aversion.
