Working Paper: NBER ID: w0966
Authors: Martin Feldstein
Abstract: This paper illustrates the importance of the fiscal framework for monetary analysis by discussing three separate issues. I begin by examining how the fiscal framework changes the macroeconomic equilibrium associated with different steady state rates of money growth. This includes a summary of research that I have presented elsewhere and comments on several additional aspects of the way in which the fiscal structure destroys the neutrality of monetary policy. The second section deals with the short-run impact of changes in monetary policy. Here again the fiscal structure complicates the economy's response to monetary policy. The final section looks at the effect of the fiscal structure on the central bank's choice of monetary policies. Because fiscal structures affect the costs and benefits of monetary policies, they are likely to influence the policies adopted.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in the fiscal framework (H68) | Alter the macroeconomic equilibrium related to steady state rates of money growth (E49) |
| Fiscal structure (H19) | Destroys the neutrality of monetary policy (E49) |
| Increase in the money stock (E51) | Rise in prices (E31) |
| Progressive tax structure (H29) | Raises effective tax rates (H29) |
| Changes in monetary policy (E52) | Complicated by the fiscal structure (H19) |
| Fiscal structure (H19) | Alters incentives for investment (H32) |
| Fiscal structure (H19) | Influences the central bank's choice of monetary policies (E52) |
| Fiscal structures (H19) | Affect the costs and benefits of monetary policies (E52) |