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Shotgun Wedding: Fiscal and Monetary Policy


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 conform the theoretical insight that lines of authority between a Treasury and a Central Bank can be ambiguous, obscure, and fragile.

Keywords: Government budget; Central Bank; Nominal anchor; Monetary-fiscal coordination;

JEL Classification: E61; E62; E63; E52;

https://doi.org/10.21034/sr.599

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Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 2020-04-08

Number: 599

Pages: 55