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Stepping on a rake: The role of fiscal policy in the inflation of the 1970s

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  • Sims, Christopher A.

Abstract

The inflation of the 1970s in the US is often discussed as if the only type of policy action that could have prevented the inflation were monetary policy actions and the only type of policy errors that might have induced the inflation were monetary policy errors. Yet fiscal policy underwent dramatic shifts in the 1970s and economic theory makes clear that in an environment of uncertainty about future fiscal policy, monetary policy instruments may lose potency or have perverse effects. This paper documents the vagaries of fiscal policy in this period and argues that people at the time must have been uncertain about fiscal policy's future course. It also lays out a theoretical framework for understanding the effects of fiscal uncertainties on monetary policy and shows that fiscal variables have predictive value in dynamic models, even if traditional monetary policy indicators are included in the system.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 1 (January)
Pages: 48-56

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:1:p:48-56

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Keywords: Monetary Fiscal Inflation;

References

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  1. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  2. 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, vol. 4(3), pages 381-99.
  3. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. René TAPSOBA & Alexandru MINEA & Jean-Louis COMBES, 2012. "Inflation Targeting and Fiscal Rules: Do Interactions and Sequence of Adoption Matter?," Working Papers 201223, CERDI.
  2. Brian Piper, 2014. "Factor-Specific Productivity," Working Papers 1401, Sam Houston State University, Department of Economics and International Business.
  3. Jean-Louis Combes & Xavier Debrun & Alexandru Minea & Rene Tapsoba, 2014. "Inflation Targeting and Fiscal Rules: Do Interactions and Sequencing Matter?," IMF Working Papers 14/89, International Monetary Fund.
  4. Eric M. Leeper & Todd B. Walker, 2011. "Fiscal Limits in Advanced Economies," NBER Working Papers 16819, National Bureau of Economic Research, Inc.
  5. Minea, Alexandru & Tapsoba, René, 2014. "Does inflation targeting improve fiscal discipline?," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 185-203.
  6. Fuad Hasanov & Reda Cherif, 2012. "Public Debt Dynamics," IMF Working Papers 12/230, International Monetary Fund.

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