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Strategic Interactions in U.S. Monetary and Fiscal Policies

Xiaoshan Chen, Eric Leeper and Campbell Leith

No 27540, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We estimate a model in which fiscal and monetary policy behavior arise from the optimizing behavior of distinct policy authorities, with potentially different welfare functions. Optimal time-consistent policy behavior fits U.S. time series at least as well as rules-based behavior. American policies often do not conform to the conventional mix of conservative monetary policy and debt-stabilizing fiscal policy. Even after the Volcker disinflation, policies did not achieve that conventional mix, as fiscal policy did not act to stabilize debt until the mid 1990s. A credible conservative central bank that follows a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. Had that strategic policy mix been in place, American might have avoided the Great Inflation. Enhancing cooperation between policy makers without an ability to commit may be detrimental to welfare.

JEL-codes: E31 E32 E52 E61 E62 E63 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Xiaoshan Chen & Eric M. Leeper & Campbell Leith, 2022. "Strategic interactions in U.S. monetary and fiscal policies," Quantitative Economics, Econometric Society, vol. 13(2), pages 593-628, May.

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