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Shotgun Wedding: Fiscal and Monetary Policy

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  • Marco Bassetto
  • Thomas J. Sargent

Abstract

This paper 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 conform the theoretical insight that lines of authority between a Treasury and a Central Bank can be ambiguous, obscure, and fragile.

Suggested Citation

  • Marco Bassetto & Thomas J. Sargent, 2020. "Shotgun Wedding: Fiscal and Monetary Policy," Staff Report 599, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:87731
    DOI: 10.21034/sr.599
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    13. Francesco Bianchi & Leonardo Melosi, 2022. "Inflation as a Fiscal Limit," Working Paper Series WP 2022-37, Federal Reserve Bank of Chicago.
    14. Bańkowski, Krzysztof & Christoffel, Kai & Faria, Thomas, 2021. "Assessing the fiscal-monetary policy mix in the euro area," Working Paper Series 2623, European Central Bank.
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    More about this item

    Keywords

    Nominal anchor; Monetary-fiscal coordination; Central Bank; Government budget;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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