Fiscal Limits and Monetary Policy

Eric Leeper

No 18877, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E31 E52 E62 E63 (search for similar items in EconPapers)
Date: 2013-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG
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Citations: View citations in EconPapers (29)

Published as Eric M. Leeper, 2013. "Fiscal Limits and Monetary Policy," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(2), pages 33-58.

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