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- Title
Strategic interactions in U.S. monetary and fiscal policies.
- Authors
Chen, Xiaoshan; Leeper, Eric M.; Leith, Campbell
- Abstract
We estimate a model in which fiscal and monetary policy obey the targeting rules of distinct policy authorities, with potentially different objective functions. We find: (1) Time‐consistent policy fits U.S. time series at least as well as instrument‐rules‐based behavior; (2) American policies often do not conform to the conventional mix of conservative monetary policy and debt‐stabilizing fiscal policy, although economic agents expect fiscal policy to stabilize debt eventually; (3) Even after the Volcker disinflation, policies did not achieve that conventional mix, as fiscal policy did not begin to stabilize debt until the mid 1990s; (4) The high inflation of the 1970s could have been effectively mitigated by either a switch to a fiscal targeting rule or an increase in monetary policy conservatism; (5) If fiscal behavior follows its historic norm to eventually stabilize debt, current high debt levels produce only modest inflation; if confidence in those norms erodes, high debt may deliver substantially more inflation.
- Subjects
FISCAL policy; MONETARY policy; CONSERVATISM (Accounting); PRICE deflation; TIME series analysis; PRICE inflation; DEBT
- Publication
Quantitative Economics, 2022, Vol 13, Issue 2, p593
- ISSN
1759-7323
- Publication type
Article
- DOI
10.3982/QE1678