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Can the fiscal authority constrain the central bank?

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  • Williamson, Stephen D.

Abstract

The fiscal theory of the price level (FTPL) suggests, in its extreme form, that the fiscal authority always constrains central bank behavior. A Fisherian model is used to show that fiscal policy can be irrelevant for the central bank, and that a central bank can act independently, even when constrained to monetize the government debt. In a model with secured credit and scarce collateral, which can explain low real interest rates, the valuation of consolidated government debt needs to account for inefficiency and liquidity premia. The fiscal authority may wish to tolerate inefficiency so as to finance public goods provision.

Suggested Citation

  • Williamson, Stephen D., 2018. "Can the fiscal authority constrain the central bank?," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 154-172.
    • Handle: RePEc:eee:dyncon:v:89:y:2018:i:c:p:154-172
    DOI: 10.1016/j.jedc.2018.01.015
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    References listed on IDEAS

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    1. Berentsen, Aleksander & Waller, Christopher, 2018. "Liquidity premiums on government debt and the fiscal theory of the price level," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 173-182.
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    8. Bassetto, Marco & Cui, Wei, 2018. "The fiscal theory of the price level in a world of low interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 5-22.
    9. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
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    Cited by:

    1. Andolfatto, David & Martin, Fernando M., 2018. "Monetary policy and liquid government debt," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 183-199.
    2. Marco Bassetto & David S. Miller, 2022. "A monetary-fiscal theory of sudden inflations," IFS Working Papers W22/56, Institute for Fiscal Studies.
    3. Roudari, Soheil & Salmani, Yunes, 2020. "Macroeconomic Effects of Government Debt to Banks in Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 15(4), pages 403-422, October.
    4. Kim, Jeong-Yoo & Choi, Hyung Sun, 2023. "Monetary policy, fiscal policy and cross signal jamming," Journal of Macroeconomics, Elsevier, vol. 75(C).
    5. David S. Miller, 2021. "A Monetary-Fiscal Theory of Sudden Inflations and Currency Crises," Finance and Economics Discussion Series 2021-057, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Central bank; Fiscal policy; Collateral; Fiscal theory;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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