Working Paper: NBER ID: w22800
Authors: Eric M. Leeper
Abstract: This essay aims to explain the nature of monetary and fiscal policy interactions and how those interactions could inform the fiscal rules that countries choose to follow. It makes two points: (1) monetary policy control of inflation requires appropriate fiscal backing; (2) European fiscal frameworks appear unlikely to provide the necessary fiscal backing.
Keywords: No keywords provided
JEL Codes: E31; E5; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy control of inflation (E64) | appropriate fiscal backing (G32) |
| fiscal policy does not respond adequately to changes in monetary policy (E63) | increased inflation expectations (E31) |
| increased inflation expectations (E31) | higher inflation rates (E31) |
| monetary policy aimed at controlling inflation (E63) | higher inflation due to passive fiscal behavior (E63) |
| higher interest rates (E43) | increased debt service and expectations of rising taxes (H69) |
| active monetary policy controls inflation (E63) | passive fiscal policy stabilizes debt (E63) |
| active fiscal policy determines the price level (E64) | monetary policy stabilizes debt (E63) |
| regime M (active monetary policy controls inflation) (E63) | passive fiscal policy stabilizes debt (E63) |
| regime F (active fiscal policy determines the price level) (E63) | inflationary pressures when fiscal policy does not adjust to monetary policy actions (E62) |