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)

[img] Text
250362.pdf - Published Version
Available under License Creative Commons Attribution Non-commercial.



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
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
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

University Staff: Request a correction | Enlighten Editors: Update this record