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Shotgun Wedding: Fiscal and Monetary Policy

Staff Report 599 | Published April 8, 2020

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Shotgun Wedding: Fiscal and Monetary Policy

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.