Macro Musings with David Beckworth cover image

Eric Leeper on the Interactions of Fiscal and Monetary Policy

Macro Musings with David Beckworth

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Central Banks Don't Operate in Isolations

For monetary poliy to successfully control inflation, fiscal policy must behave in a particular circumscribed manner. When volker was doing this, debt, as a share g d p was about 25% Now it's a hundred%. If the fed has to raise interest rates to about five%, that's going to raise debt service by about a trillion dollars. And what will happen is, bondholders will be getting more interest payments. That positive wealth effect could undermine the fed's ability to bring inflation down.

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