NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Stepping on a Rake: the Fiscal Theory of Monetary Policy

John H. Cochrane

NBER Working Paper No. 22979
Issued in December 2016, Revised in October 2017
NBER Program(s):AP, EFG, ME

The fiscal theory of the price level can describe monetary policy. Governments can set interest rate targets and thereby affect inflation, with no change in fiscal surpluses. The same basic mechanism describes interest rate targets, forward guidance, open market operations, and quantitative easing. It does not require any monetary, pricing, or other frictions. In the presence of long-term debt, higher interest rates lead to temporarily lower inflation, a challenging sign. I derive and replicate the results of the Sims (2011) “stepping on a rake” model, which first produced this negative sign, and produces realistic impulse-response functions. I show that Sims' result is robust to many model features, but essentially requires long-term debt.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Supplementary materials for this paper:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22979

Published: John H. Cochrane, 2017. "Stepping on a Rake: the Fiscal Theory of Monetary Policy," European Economic Review, .

Users who downloaded this paper also downloaded* these:
Foote, Loewenstein, and Willen w22985 Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications
Cochrane w22485 Macro-Finance
Li, He, Liu, Fraumeni, and Zheng w22906 Regional Distribution and Dynamics of Human Capital in China 1985-2014: Education, Urbanization, and Aging of the Population
Reis w23014 Can the Central Bank Alleviate Fiscal Burdens?
Gerakos, Linnainmaa, and Morse w22982 Asset Managers: Institutional Performance and Smart Betas
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

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

Contact Us