Fiscal Monetary Interactions

Damien Capelle · Yang Liu

This paper analyzes the effectiveness of a tax on inflation policy (TIP)—a fiscal instrument that would require firms to pay a tax proportional to the increase in their prices—as a complement to …

John H. Cochrane

Cochrane asks whether U.S. postwar inflation can be understood using a "frictionless" fiscal theory of the price level -- in which the price level is pinned down by the government's intertemporal …

Atif Mian · Ludwig Straub · Amir Sufi

This paper develops a tractable continuous-time model to study the fiscal sustainability of government deficits and the joint dynamics of public debt, with two main ingredients: an endogenous interest …

Allen N. Berger · Onesime Epouhe · Raluca A. Roman

This paper examines the effects of the Troubled Asset Relief Program (TARP) and the Paycheck Protection Program (PPP)—two government bailout programs during the Global Financial Crisis and the …

Jess Benhabib · Stephanie Schmitt-Grohé · Martín Uribe

Because a Taylor-type interest-rate rule must be consistent with the zero nominal-interest-rate bound, it always admits a second, unintended steady state with low or negative inflation alongside the …

George-Marios Angeletos · Chen Lian · Christian K. Wolf

The paper asks whether a government can run a deficit today — issuing "stimulus checks" — and allow debt to return to its initial level without any future tax hike or spending cut. In environments …

Valerie A. Ramey

Surveying theory, aggregate U.S. time-series evidence, and the newer cross-state/cross-locality literature on the government-spending multiplier, Ramey concludes that the multiplier for a temporary, …

Kevin X.D. Huang · Qinglai Meng · Jianpo Xue

This paper overturns the longstanding consensus established by Schmitt-Grohé and Uribe (1997) that relying on capital income tax adjustments to balance the government budget immunizes the economy …

Marvin Goodfriend

Classifying Federal Reserve crisis-era interventions into monetary policy, credit policy, and interest-on-reserves policy, Goodfriend argues that only "Treasuries only" monetary policy is fiscally …

Christoph Grosse-Steffen · Laura Pagenhardt · Malte Rieth

A central debate in fiscal policy is whether fiscal rules—numerical constraints on budget deficits or debt levels—impair a government's ability to respond to adverse economic shocks, creating a …

John H. Cochrane

Cochrane argues that the standard new-Keynesian account of how a Taylor rule pins down inflation is incomplete -- it works only by assuming the government will follow policies that amount to a threat …

François R. Velde · Marcelo Veracierto

Written on the eve of Argentina's 2001-02 currency-board collapse, this Chicago Fed policy piece examines Argentina's 1991-99 dollar peg as a test case for the costs and benefits of full …

Christopher A. Sims

Sims argues that fiat government debt is best understood as analogous to privately issued equity rather than to privately issued debt, since it promises only future paper rather than a commodity the …

Rishabh Aggarwal · Adrien Auclert · Matthew Rognlie · Ludwig Straub

In a multi-country heterogeneous-agent New Keynesian model, debt-financed fiscal transfers eventually raise the world interest rate and are entirely absorbed by foreign lenders, but in the short run a …

Elhanan Helpman · Assaf Razin

This 1987 American Economic Review paper by Elhanan Helpman and Assaf Razin shows that managing an exchange rate is never a purely monetary act: it is feasible only together with a monetary-fiscal …

Zefeng Chen · Zhengyang Jiang · Hanno Lustig · Stijn Van Nieuwerburgh · Mindy Z. Xiaolan

This paper studies three centuries of U.K. fiscal history to understand the fiscal implications of safe asset supplier status — what the authors call "exorbitant privilege" — and how it can be gained …

Adrien Auclert · Matthew Rognlie · Ludwig Straub

Auclert, Rognlie, and Straub review a decade of Heterogeneous-Agent New Keynesian (HANK) research through a single canonical model, showing that monetary and balanced-budget fiscal policy have …

Christopher A. Sims

Applying the fiscal theory of the price level's corporate-finance analogy -- fiat (own-currency) government debt behaves like equity, while dollar-denominated or indexed debt behaves like conventional …

Hanno Lustig · Christopher Sleet · Şevin Yeltekin

Solving a Ramsey model of optimal fiscal and monetary policy in which the government can finance itself only with non-contingent nominal bonds of various maturities, this paper finds that optimal …

Giancarlo Corsetti · Bartosz Maćkowiak

This paper builds a model in which a currency crisis is triggered by a "fiscal imbalance" -- an anticipated decline in the government's future primary surpluses -- and shows that the size and maturity …

Antoine Camous

The conventional division of labour holds that central banks should not target distribution and that fiscal policy, with its targeted instruments, should handle the redistributive consequences of …

Michael Woodford

Woodford argues that commitment to a sound monetary policy rule, such as a Taylor rule, cannot by itself guarantee price stability, because Ricardian equivalence fails to make fiscal policy irrelevant …

François R. Velde

In 1716-1720, John Law restructured French public finance by converting most of the government's debt into equity in a trading-and-tax-farming conglomerate and replacing silver coin with paper money; …

Craig Burnside · Martin Eichenbaum · Sergio Rebelo

This paper builds a general-equilibrium model in which a currency crisis is triggered by prospective government deficits and shows that governments finance the resulting fiscal costs mainly through …

Fabio Ghironi · Daisoon Kim · Galip Kemal Ozhan

Sanctions are increasingly used as an instrument of economic statecraft, yet their macroeconomic consequences—especially the transitional dynamics and their effects on business cycles—are poorly …

Thomas J. Sargent · Joseph Zeira

Israeli inflation jumped from 130% to 400% in October 1983 with no contemporaneous rise in the government deficit; Sargent and Zeira attribute the jump to the government's announced bailout of …

John H. Cochrane

Extending the fiscal theory of the price level to long-term government debt, Cochrane shows that the maturity structure of outstanding debt determines whether news about future deficits shows up as …

Thomas J. Sargent · François R. Velde

Interpreting the French Revolution through the lens of government-budget-constraint theory, this paper traces how a pre-1789 fiscal crisis, the assignat's evolution from tax-backed money into fiat …

Iván Werning

Working with a continuous-time New Keynesian model, this paper shows that discretionary monetary policy during a liquidity trap produces deflation and depression that get worse, not better, as prices …

Adrien Auclert · Hugo Monnery · Matthew Rognlie · Ludwig Straub

In a heterogeneous-agent New Keynesian model of an energy-importing small open economy, realistically high MPCs combined with a realistically low elasticity of substitution between energy and other …

Leonall C. Andersen · Jerry L. Jordan

This 1968 Federal Reserve Bank of St. Louis Review article by Leonall Andersen and Jerry Jordan — later known as the "St.

Luis G. Hernández-Román

This paper employs a proxy structural VAR model to examine the effects of global supply chain (GSC) shocks on U.S. macroeconomic variables and the Federal Reserve's historical response, and evaluates …

Sebastian Schmidt

The paper builds a discrete-time DSGE model with Calvo sticky prices in which the public sector has two feedback rules that can hit corners, generating endogenous shifts between an "orthodox" regime …

John H. Cochrane

Cochrane argues that the fiscal theory of the price level rests on a valuation equation, not a budget constraint -- nominal government debt is priced like a claim on future government surpluses, …

Adrien Auclert · Bence Bardóczy · Matthew Rognlie

This paper shows that New Keynesian models with frictionless labor supply cannot simultaneously match three well-established empirical facts -- high marginal propensities to consume, low marginal …

Craig Burnside · Martin Eichenbaum · Sergio Rebelo

Studies how governments finance the fiscal costs of "twin" currency-and-banking crises and shows that debt devaluation and implicit or explicit fiscal reform, not just money printing, can explain why …

Stephanie Schmitt-Grohé · Martín Uribe

Studying optimal Ramsey fiscal and monetary policy in a sticky-price production economy where the government can tax only distortingly and can issue only nominal, non-state-contingent bonds, …

François Le Grand · Xavier Ragot

The Chamley-Judd result (1986) states that the optimal long-run capital income tax rate is zero in representative-agent models. This paper shows that introducing heterogeneous agents — specifically, …

Alisdair McKay · Christian K. Wolf

This paper characterizes optimal monetary and fiscal policy rules in a heterogeneous-agent New Keynesian (HANK) model and finds that a "dual mandate" central bank's optimal targeting rule is identical …

Jens H. E. Christensen · Simon T. Hetland

The paper introduces the concept of "passive quantitative easing" (passive QE): a deliberate reduction in government debt issuance that lowers anticipated future bond supply and reduces long-term …

Michael Woodford

Woodford shows that the price level remains determinate even under two forms of radical money-supply endogeneity long thought to destroy monetary control -- a central-bank interest-rate peg and …

Craig Burnside · Martin Eichenbaum · Sergio Rebelo

Argues that the 1997 Asian currency crisis was driven by large prospective government deficits -- the anticipated future fiscal cost of bailing out failing banking systems -- rather than by the …

Joao Ayres · Gaston Navarro · Juan Pablo Nicolini · Pedro Teles

This paper asks whether sovereign debt crises can be self-fulfilling — triggered by lenders' expectations of default rather than by weak fiscal fundamentals alone — and whether such crises are …

Michael Woodford

This paper works through a series of simple, analytically solvable New Keynesian models to show that the size of the government-spending multiplier depends almost entirely on the monetary policy …

Thomas J. Sargent · Neil Wallace

Sargent and Wallace show that even in a fully monetarist economy, a monetary authority that tightens money today while an independent fiscal authority's deficits are taken as given must finance the …

Christopher A. Sims

Against the standard narrative that only monetary policy errors could have caused or prevented the 1970s US inflation, Sims documents dramatic swings in US fiscal stance over the period and shows, in …

Alan J. Auerbach · Maurice Obstfeld

Auerbach and Obstfeld argue that even if money and bonds are perfect substitutes at a zero short-term nominal interest rate -- the textbook reason open-market operations are said to be powerless in a …

Thomas J. Sargent

This paper studies the abrupt endings of four post-World War I European hyperinflations -- in Austria, Hungary, Poland, and Germany -- arguing that each stopped suddenly and at a comparatively low …

Marcus Hagedorn · Iourii Manovskii · Kurt Mitman

This paper builds a Heterogeneous Agent New Keynesian (HANK) model with incomplete markets, capital, and nominal price/wage rigidities -- with a government budget constraint specified in nominal terms …

Adrien Auclert · Matthew Rognlie · Ludwig Straub

This paper derives an "intertemporal Keynesian cross" showing that intertemporal marginal propensities to consume (iMPCs) are sufficient statistics for the output response of fiscal policy in …

Christopher A. Sims

Outlining the fiscal theory of the price level and its implications for monetary policy under inflationary and deflationary stress, Sims argues that the Maastricht Treaty's elaborate monetary …

Alisdair McKay · Ricardo Reis

This paper builds a business-cycle model merging the standard incomplete-markets model with the New Keynesian model of nominal rigidities to quantify how much automatic fiscal stabilizers (progressive …

Mamoon Kader · Hashmat Khan · Minjoon Lee · Raúl Razo-García

This paper uses an open-economy heterogeneous-household model with incomplete markets to evaluate the welfare and distributional consequences of the U.S. Tax Cuts and Jobs Act (TCJA) of 2017 — which …

Sushant Acharya · Keshav Dogra

Using an analytically tractable heterogeneous-agent New Keynesian model with CARA preferences and normally distributed idiosyncratic income risk, the paper shows that whether incomplete markets …

John H. Cochrane

Using the government-debt valuation equation -- the requirement that the real value of outstanding government debt equal the present value of future primary surpluses -- this paper argues that after …

Jason Choi · Rishabh Kirpalani · Diego J. Perez

This paper asks whether the U.S. government exploits its market power as the dominant global supplier of safe assets when setting the quantity of public debt, and quantifies the macroeconomic …

Michael D. Bordo · Carlos A. Végh

Comparing Argentina's high, chronic nineteenth-century inflation to the United States' price stability, this paper argues the divergence reflects not differing policy competence but the different …

Lawrence Christiano · Martin Eichenbaum · Sergio Rebelo

The government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds, and the larger the fraction of the spending that occurs while the nominal …