Strategic interactions in U.S. monetary and fiscal policies

Chen, X., Leeper, E. M. and Leith, C. (2022) Strategic interactions in U.S. monetary and fiscal policies. Quantitative Economics, 13(2), pp. 593-628. (doi: 10.3982/QE1678)

Abstract

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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Leeper, Professor Eric Michael and Leith, Professor Campbell and Chen, Dr Xiaoshan
• Authors: Chen, X., Leeper, E. M., and Leith, C.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Quantitative Economics
• Publisher: Wiley
• ISSN: 1759-7323
• ISSN (Online): 1759-7331
• Published Online: 25 May 2022
• Copyright Holders: Copyright © 2022 The Author(s)
• First Published: First published in Quantitative Economics 13(2): 593-628
• Publisher Policy: Reproduced under a Creative Commons licence