Working Paper: NBER ID: w1295
Authors: Michael R. Darby
Abstract: Contrary to the conclusion of Sargent and Wallace, it is possible to exogenously and independently vary monetary and fiscal policy and retain steady-state equlibrium in economies like the United States. In particular,the central bank is not forced to monetize increased deficits either now or in the future. This conclusion is based on the fact that the real after-tax yield on government bonds is considerably less than the growth rate of real income except during brief disinflationary periods.
Keywords: Monetary Policy; Fiscal Policy; Economic Equilibrium
JEL Codes: D5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending (g) (E20) | debt-to-income ratio (d) (F34) |
| taxes (t) (H29) | debt-to-income ratio (d) (F34) |
| growth rate of real income (y) (O40) | debt-to-income ratio (d) (F34) |
| real after-tax interest rate (r) (E43) | debt-to-income ratio (d) (F34) |
| growth rate of real income (y) > real after-tax interest rate (r) (E25) | stable debt-to-income ratio (d) (F34) |