NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Anchors Away: How Fiscal Policy Can Undermine the Taylor Principle

Eric M. Leeper

NBER Working Paper No. 15514
Issued in November 2009
NBER Program(s):   EFG

Slow moving demographics are aging populations around the world and pushing many countries into an extended period of heightened fiscal stress. In some countries, taxes alone cannot or likely will not fully fund projected pension and health care expenditures. If economic agents place sufficient probability on the economy hitting its "fiscal limit" at some point in the future--after which further tax revenues are not forthcoming--it may no longer be possible for monetary policy behavior that obeys the Taylor principle to control inflation or anchor inflation expectations. In the period leading up to the fiscal limit, the more aggressively that monetary policy leans against inflationary winds, the more expected inflation becomes unhinged from the inflation target. Problems confronting monetary policy are exacerbated when policy institutions leave fiscal objectives and targets unspecified and, therefore, fiscal expectations unanchored. In light of this theory, the paper contrasts monetary-fiscal policy frameworks in the United States and Chile.

download in pdf format
   (329 K)

email paper

This paper is available as PDF (329 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15514

Users who downloaded this paper also downloaded these:
Davig and Leeper w15133 Monetary-Fiscal Policy Interactions and Fiscal Stimulus
Leeper w15269 Anchoring Fiscal Expectations
Alesina and Ardagna w15438 Large Changes in Fiscal Policy: Taxes Versus Spending
Auerbach and Gale w15407 Activist Fiscal Policy to Stabilize Economic Activity
Feldstein w14684 Rethinking the Role of Fiscal Policy
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us