Fiscal Limits and Monetary Policy

Eric Leeper

Central Bank Review, 2013, vol. 13, issue 2, 33-58

Abstract: Every economy faces a ``fiscal limit'' that delivers the maximum government debt-GDP ratio that can be sustained without appreciable risk of default or higher inflation. But governments in advanced economies issue substantial nominal debt and nominal debt is a commitment to repay in nominal units. When such economies are approaching their fiscal limits, debt can be devalued through higher current and future inflation rates. The paper develops a simple bond market supply-demand apparatus to explain how fiscal policy can be a source of inflation, while monetary policy merely determines the timing of inflation

Keywords: Monetary-fiscal interactions; Sovereign risk; Fiscal theory (search for similar items in EconPapers)
JEL-codes: E31 E52 E62 E63 (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (29)

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Working Paper: Fiscal Limits and Monetary Policy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:cebare:v:13:y:2013:i:2:p:33-58

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