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Fiscal Limits and Monetary Policy

  • Eric M. Leeper

Every economy faces a ``fiscal limit'' that delivers the maximum government debt-GDP ratio that can be sustained without appreciable risk of default or higher inflation. But governments in advanced economies issue substantial nominal debt and nominal debt is a commitment to repay in nominal units. When such economies are approaching their fiscal limits, debt can be devalued through higher current and future inflation rates. The paper develops a simple bond market supply-demand apparatus to explain how fiscal policy can be a source of inflation, while monetary policy merely determines the timing of inflation

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File URL: https://www3.tcmb.gov.tr/cbr/index.php/cbreview/article/view/379/322
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Article provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its journal Central Bank Review.

Volume (Year): 13 (2013)
Issue (Month): 2 ()
Pages: 33-58

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Handle: RePEc:tcb:cebare:v:13:y:2013:i:2:p:33-58
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  1. Troy Davig & Eric M. Leeper & Hess Chung, 2004. "Monetary and Fiscal Policy Switching," NBER Working Papers 10362, National Bureau of Economic Research, Inc.
  2. Bianchi, Francesco, 2008. "Regime switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," MPRA Paper 24251, University Library of Munich, Germany, revised 19 Jan 2010.
  3. Francesco Bianchi, 2011. "Monetary/Fiscal Policy Mix and Agents' Beliefs," 2011 Meeting Papers 156, Society for Economic Dynamics.
  4. Troy Davig & Eric M. Leeper & Todd B. Walker, 2010. ""Unfunded liabilities" and uncertain fiscal financing," Research Working Paper RWP 10-09, Federal Reserve Bank of Kansas City.
  5. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
  6. Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  7. Stefano Eusepi & Bruce Preston, 2011. "Learning the fiscal theory of the price level: some consequences of debt management policy," Staff Reports 515, Federal Reserve Bank of New York.
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