Quantitative Economics

Journal Of The Econometric Society

Edited by: Stéphane Bonhomme • Print ISSN: 1759-7323 • Online ISSN: 1759-7331

Quantitative Economics: May, 2022, Volume 13, Issue 2

Strategic interactions in U.S. monetary and fiscal policies

Xiaoshan Chen, Eric M. Leeper, Campbell Leith

We estimate a model in which fiscal and monetary policy obey the targeting rules of distinct policy authorities, with potentially different objective functions. We find: (1) Time‐consistent policy fits U.S. time series at least as well as instrument‐rules‐based behavior; (2) American policies often do not conform to the conventional mix of conservative monetary policy and debt‐stabilizing fiscal policy, although economic agents expect fiscal policy to stabilize debt eventually; (3) Even after the Volcker disinflation, policies did not achieve that conventional mix, as fiscal policy did not begin to stabilize debt until the mid 1990s; (4) The high inflation of the 1970s could have been effectively mitigated by either a switch to a fiscal targeting rule or an increase in monetary policy conservatism; (5) If fiscal behavior follows its historic norm to eventually stabilize debt, current high debt levels produce only modest inflation; if confidence in those norms erodes, high debt may deliver substantially more inflation.

Bayesian estimation monetary and fiscal policy interactions targeting rules Markov switching C11 E31 E63

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Supplemental Material

Supplement to "Strategic interactions in U.S. monetary and fiscal policies"

Supplement to "Strategic interactions in U.S. monetary and fiscal policies"

Supplement to "Strategic interactions in U.S. monetary and fiscal policies"

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