Working Paper: NBER ID: w27004
Authors: Marco Bassetto; Thomas J. Sargent
Abstract: This paper describes interactions between monetary and fiscal policies that affect equilibrium price levels and interest rates by critically surveying theories about (a) optimal anticipated inflation, (b) optimal unanticipated inflation, and (c) conditions that secure a "nominal anchor'' in the sense of a unique price level path. We contrast incomplete theories whose inputs are budget-feasible sequences of government issued bonds and money with complete theories whose inputs are bond-money strategies described as sequences of functions that map time t histories into time t government actions. We cite historical episodes that confirm the theoretical insight that lines of authority between a Treasury and a Central Bank can be ambiguous, obscure, and fragile.
Keywords: Fiscal Policy; Monetary Policy; Inflation; Nominal Anchor
JEL Codes: E52; E61; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Coordination of monetary and fiscal policies (E61) | Stabilizing equilibrium price levels and interest rates (E52) |
| Lack of alignment between fiscal and monetary policies (E62) | Ambiguous outcomes in economic stability (D59) |
| Structure of fiscal authority (H19) | Economic outcomes (F69) |
| Inflation expectations (E31) | Fiscal policy decisions (E62) |
| Type of money used (E42) | Economic efficiency (D61) |