Eric Leeper on the Interactions of Fiscal and Monetary Policy
Macro Musings with David Beckworth
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What Is Fiscal Dominance?
Fiscal dominance is a special case of monetary and fiscal interactions, where the government issues nominal liabilities. Government debt is real, and therefore has to be backed fully by real taxation. If those bonds are fully taxed, fully backed by taxes, then individuals will think they can spend more money without paying as much tax. And that would be considered fiscal dominance. But suppose that what happens is this spending is regarded as emergency spending, and there's no discussion at all about how it's going to get paid for. Then people see these transfer s as an increase in their wealth. And like any increase in wealth, they're going to save some of it, spend some of it,. which is exactly
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