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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.

Suggested Citation

  • Martin Feldstein, 1982. "The Fiscal Framework of Monetary Policy," NBER Working Papers 0966, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0966
    Note: EFG PE

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    References listed on IDEAS

    1. 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.
    2. 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.
    3. Martin Feldstein & Jerry Green & Eytan Sheshinski, 1983. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 44-60 National Bureau of Economic Research, Inc.
    4. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-282, June.
    5. 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.
    6. James M. Poterba, 1980. "Inflation, Income Taxes, and Owner-Occupied Housing," NBER Working Papers 0553, National Bureau of Economic Research, Inc.
    7. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280-280.
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    Cited by:

    1. Chen, David Y., 2007. "Effects of monetary policy on the twin deficits," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(2), pages 279-292, May.
    2. Mark Warshawsky, 1982. "Life Insurance Savings and the After-Tax Life Insurance Rate of Return," NBER Working Papers 1040, National Bureau of Economic Research, Inc.

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