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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.

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  • 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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    Cited by:

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    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.
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    6. 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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    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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