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Monetary science, fiscal alchemy

  • Eric M. Leeper

Monetary policy decisions tend to be based on systematic analysis of alternative policy choices and their associated macroeconomic impacts: this is science. Fiscal policy choices, in contrast, spring from unsystematic speculation, grounded more in politics than economics: this is alchemy. In normal times, fiscal alchemy poses no insurmountable problems for monetary policy because fiscal expectations can be extrapolated from past fiscal behavior. But normal times may be coming to an end: aging populations are causing promised government old-age benefits to grow relentlessly and many governments have no plans for financing the benefits. In this era of fiscal stress, fiscal expectations are unanchored and fiscal alchemy creates unnecessary uncertainty and can undermine the ability of monetary policy to control inflation and influence real economic activity in the usual ways.

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Article provided by Federal Reserve Bank of Kansas City in its journal Proceedings - Economic Policy Symposium - Jackson Hole.

Volume (Year): (2010)
Issue (Month): ()
Pages: 361-434

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Handle: RePEc:fip:fedkpr:y:2010:p:361-434
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