Working Paper: CEPR ID: DP14160
Authors: Guillaume Plantin; Jean Barthelemy; Eric Mengus
Abstract: This paper studies how a crisis that induces a large negative fiscal shock and a strong demand for safe stores of value affects the independence of a central bank vis-a-vis a fiscal authority that seeks to inflate away public liabilities. We find that the central bank can maintain price stability only if there is a large demand for its liabilities, so that it can control the net increase in government debt heldby the private sector. We show that fiscal requirements are necessary even with low interest rates and massive reserve issuance is not necessarily a sign of fiscal dominance.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand for central bank liabilities (E41) | independence of central bank (E58) |
| independence of central bank (E58) | ability to control government debt (H63) |
| demand for central bank liabilities (E41) | ability to control government debt (H63) |
| fiscal authority actions (E62) | inflationary pressures (E31) |
| fiscal requirements (E62) | price stability (E31) |
| central bank's ability to maintain price stability (E58) | demand for central bank liabilities (E41) |