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Strategic Interactions in U.S. Monetary and Fiscal Policies

Chen, X.; Leeper, E.M.; Leith, C.

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Authors

E.M. Leeper

C. Leith



Abstract

We estimate a model in which fiscal and monetary policy obey the targeting rulesof distinct policy authorities, with potentially different objective functions. Wefind: (1) Time-consistent policy fits U.S. time series at least as well as instrument-rules-based behavior; (2) American policies often do not conform to the conven-tional mix of conservative monetary policy and debt-stabilizing fiscal policy, al-though economic agents expect fiscal policy to stabilize debt eventually; (3) Evenafter the Volcker disinflation, policies did not achieve that conventional mix, asfiscal policy did not begin to stabilize debt until the mid 1990s; (4) The high in-flation of the 1970s could have been effectively mitigated by either a switch to afiscal targeting rule or an increase in monetary policy conservatism; (5) If fiscalbehavior follows its historic norm to eventually stabilize debt, current high debtlevels produce only modest inflation; if confidence in those norms erodes, highdebt may deliver substantially more inflation.

Citation

Chen, X., Leeper, E., & Leith, C. (2022). Strategic Interactions in U.S. Monetary and Fiscal Policies. Quantitative Economics, 13(2), 593-628. https://doi.org/10.3982/qe1678

Journal Article Type Article
Acceptance Date Aug 22, 2021
Online Publication Date May 25, 2022
Publication Date 2022-05
Deposit Date Aug 23, 2021
Publicly Available Date Jul 14, 2022
Journal Quantitative Economics
Publisher Econometric Society
Peer Reviewed Peer Reviewed
Volume 13
Issue 2
Pages 593-628
DOI https://doi.org/10.3982/qe1678
Public URL https://durham-repository.worktribe.com/output/1242431

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Publisher Licence URL
http://creativecommons.org/licenses/by-nc/4.0/

Copyright Statement
Copyright © 2022 The Authors.

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited and is not used for commercial purposes.





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