Strategic Interactions in U.S. Monetary and Fiscal Policies

Chen, X.; Leeper, E.M.; Leith, C.

Abstract

We estimate a model in which fiscal and monetary policy obey the targeting rulesof distinct policy authorities, with potentially different objective functions. Wefind: (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 conven-tional mix of conservative monetary policy and debt-stabilizing fiscal policy, al-though economic agents expect fiscal policy to stabilize debt eventually; (3) Evenafter the Volcker disinflation, policies did not achieve that conventional mix, asfiscal policy did not begin to stabilize debt until the mid 1990s; (4) The high in-flation of the 1970s could have been effectively mitigated by either a switch to afiscal targeting rule or an increase in monetary policy conservatism; (5) If fiscalbehavior follows its historic norm to eventually stabilize debt, current high debtlevels produce only modest inflation; if confidence in those norms erodes, highdebt may deliver substantially more inflation.

Citation

Chen, X., Leeper, E., & Leith, C. (2022). Strategic Interactions in U.S. Monetary and Fiscal Policies. Quantitative Economics, 13(2), 593-628. https://doi.org/10.3982/qe1678

• Journal Article Type: Article
• Acceptance Date: Aug 22, 2021
• Online Publication Date: May 25, 2022
• Publication Date: 2022-05
• Deposit Date: Aug 23, 2021
• Publicly Available Date: Jul 14, 2022
• Journal: Quantitative Economics
• Electronic ISSN: 1759-7331
• Publisher: Econometric Society
• Peer Reviewed: Peer Reviewed
• Volume: 13
• Issue: 2
• Pages: 593-628
• DOI: https://doi.org/10.3982/qe1678
• Public URL: https://durham-repository.worktribe.com/output/1242431