Shotgun wedding: Fiscal and monetary policy

Marco Bassetto, Thomas J. Sargent

    Research output: Contribution to journalReview articlepeer-review

    Abstract

    This review 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.

    Original languageEnglish (US)
    Pages (from-to)659-690
    Number of pages32
    JournalAnnual Review of Economics
    Volume12
    DOIs
    StatePublished - Aug 2 2020

    Keywords

    • Central bank
    • Government budget
    • Inflation
    • Monetary/fiscal coordination
    • Nominal anchor

    ASJC Scopus subject areas

    • Economics and Econometrics

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