Macro Musings with David Beckworth Eric Leeper on the Interactions of Fiscal and Monetary Policy
7 snips
Apr 4, 2022 AI Snips
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Fiscal Versus Monetary Dominance
- Fiscal dominance occurs when fiscal actions (e.g., unbacked transfers) are treated as permanent by households and raise aggregate demand and prices.
- Monetary dominance instead requires fiscal policy to stabilize debt so the central bank can control inflation.
Active And Passive Policy Roles
- An active policy pursues its objective without responding to the other authority, while a passive policy stabilizes debt given the other's actions.
- Sargent and Wallace's unpleasant arithmetic is a special case where fiscal is active and monetary provides required seigniorage.
The 'Dirty Little Secret' About Disinflation
- Successful monetary disinflations require fiscal support such as future tax increases to back reduced inflation.
- Without fiscal tightening, higher interest costs can create wealth effects that undermine monetary tightening.