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The Fiscal Framework of Monetary Policy

  • Martin Feldstein

This paper illustrates the importance of the fiscal framework for monetary analysis by discussing three separate issues. I begin by examining how the fiscal framework changes the macroeconomic equilibrium associated with different steady state rates of money growth. This includes a summary of research that I have presented elsewhere and comments on several additional aspects of the way in which the fiscal structure destroys the neutrality of monetary policy. The second section deals with the short-run impact of changes in monetary policy. Here again the fiscal structure complicates the economy's response to monetary policy. The final section looks at the effect of the fiscal structure on the central bank's choice of monetary policies. Because fiscal structures affect the costs and benefits of monetary policies, they are likely to influence the policies adopted.

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File URL: http://www.nber.org/papers/w0966.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0966.

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Date of creation: Aug 1982
Date of revision:
Publication status: published as Feldstein, Martin. "The Fiscal Framework of Monetary Policy." Economic Inquiry, Vol. 21, No. 1 (January 1983), pp. 11-23.
Handle: RePEc:nbr:nberwo:0966
Note: EFG PE
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  1. Sheshinski, Eytan & Feldstein, Martin & Green, Jerry & Auerbach, Alan, 1978. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," Scholarly Articles 3203645, Harvard University Department of Economics.
  2. Robert J. Shiller, 1980. "Can the Fed Control Real Interest Rates?," NBER Chapters, in: Rational Expectations and Economic Policy, pages 117-167 National Bureau of Economic Research, Inc.
  3. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
  4. Auerbach, Alan J., 1984. "Taxes, firm financial policy and the cost of capital: An empirical analysis," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 27-57.
  5. James M. Poterba, 1980. "Inflation, Income Taxes, and Owner-Occupied Housing," NBER Working Papers 0553, National Bureau of Economic Research, Inc.
  6. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June.
  7. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280.
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