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Can the fiscal authority constrain the central bank?

Stephen Williamson ()

Journal of Economic Dynamics and Control, 2018, vol. 89, issue C, 154-172

Abstract: The fiscal theory of the price level (FTPL) suggests, in its extreme form, that the fiscal authority always constrains central bank behavior. A Fisherian model is used to show that fiscal policy can be irrelevant for the central bank, and that a central bank can act independently, even when constrained to monetize the government debt. In a model with secured credit and scarce collateral, which can explain low real interest rates, the valuation of consolidated government debt needs to account for inefficiency and liquidity premia. The fiscal authority may wish to tolerate inefficiency so as to finance public goods provision.

Keywords: Central bank; Fiscal policy; Collateral; Fiscal theory (search for similar items in EconPapers)
JEL-codes: E4 E5 E6 (search for similar items in EconPapers)
Date: 2018
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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Handle: RePEc:eee:dyncon:v:89:y:2018:i:c:p:154-172