Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength

Francesco Bianchi, Renato Faccini and Leonardo Melosi

No WP-2020-13, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: The COVID pandemic hit the US economy at a time in which the ability of policymakers to react to adverse shocks is greatly limited. The current low interest rate environment limits the Federal Reserve's ability to stabilize the economy, while the large public debt curtails the efficacy of fiscal interventions by inducing expectations of costly fiscal adjustments. A solution to this impasse is a coordinated fiscal and monetary strategy aiming at creating a controlled rise of inflation to wear away a targeted fraction of debt. Under our coordinated strategy, the fiscal authority introduces an emergency budget with no provisions on how it will be balanced, while the monetary authority allows a temporary increase in inflation. The coordinated strategy enhances the efficacy of the fiscal stimulus planned in response to the COVID pandemic and allows the Federal Reserve to correct a prolonged period of below-target inflation. The strategy results in only moderate levels of inflation by separating long-run fiscal sustainability from a short-run policy intervention.

Keywords: Monetary policy; fiscal policy; emergency budget; shock specific rule; COVID-19 (search for similar items in EconPapers)
JEL-codes: E30 E52 E62 (search for similar items in EconPapers)
Pages: 34
Date: 2020-05-12
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
https://www.chicagofed.org/~/media/publications/wo ... 20/wp2020-13-pdf.pdf full text (application/pdf)

Related works:
Working Paper: Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength (2020)
Working Paper: Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength (2020)
Working Paper: Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:92704

Ordering information: This working paper can be ordered from

DOI: 10.21033/wp-2020-13

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of Chicago Contact information at EDIRC.
Bibliographic data for series maintained by Lauren Wiese ().