Understanding Inflation as a Joint Monetary-Fiscal Phenomenon
We develop the theory of price-level determination in a range of models using both ad hoc policy rules and jointly optimal monetary and fiscal policies and discuss empirical issues that arise when trying to identify monetary-fiscal regime. The article concludes with directions in which theoretical and empirical developments may go. The article is prepared for the Handbook of Macroeconomics, volume 2 (John B. Taylor and Harald Uhlig, editors, Elsevier Press).
This paper has benefited from collaborations and discussions with many coauthors and colleagues and we thank them. We also thank Jon Faust, Ding Liu, Jim Nason, Charles Nolan, Fei Tan, and Todd Walker for conversations and Bob Barsky, John Cochrane, John Taylor, and Harald Uhlig for comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.