Shotgun Wedding: Fiscal and Monetary Policy
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 confirm the theoretical insight that lines of authority between a Treasury and a Central Bank can be ambiguous, obscure, and fragile.
We thank John H. Cochrane and a referee for helpful comments. The views expressed in this paper are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the National Bureau of Economic Research. When citing this paper, please use the following: Bassetto, Marco, Sargent, Thomas J. 2020. Shotgun Wedding: Fiscal and Monetary Policy. Annual Review of Economics: Submitted. https://doi.org/10.1146/annurev-economics-091319-050022
Marco Bassetto & Thomas J. Sargent, 2020. "Shotgun Wedding: Fiscal and Monetary Policy," Annual Review of Economics, vol 12(1).