Working Paper: NBER ID: w16819
Authors: Eric M. Leeper; Todd B. Walker
Abstract: Aging populations in advanced economies are placing ever-increasing demands on government spending in the form of old-age benefits. Economies that have promised substantially more benefits than they have made provision to finance are heading into a prolonged era of fiscal stress. Unresolved fiscal stress raises the possibility that the economies will hit their fiscal limits where taxes and spending no longer adjust to stabilize debt. In such economies, monetary policy may lose its ability to control inflation and influence the economy in the usual ways. The paper discusses models of fiscal limits and their implications and lays out a research agenda to integrate political economy and empirical considerations with general equilibrium models of monetary and fiscal interactions.
Keywords: No keywords provided
JEL Codes: E30; E62; E63; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unresolved fiscal stress (H69) | effectiveness of monetary policy (E52) |
| unresolved fiscal stress (H69) | inflation control (E64) |
| uncertainty surrounding future fiscal policies (E62) | inflationary pressures (E31) |
| agents' expectations of policy shifts (D84) | divergence between expected and actual inflation (E31) |
| fiscal expectations anchoring (H68) | monetary policy control over inflation (E64) |