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Issues in the Coordination of Monetary and Fiscal Policy

  • Alan S. Blinder

This paper examines issues in the current debate over coordination between fiscal and monetary policies. Section I1 uses the traditional targets-instruments approach to assess the potential gains from greater coordination. Since greater coordination is often equated with looser money and tighter fiscal policy, two econometric models of the economy are used to estimate the quantitative importance of the policy mix. Expectational effects that arise from the government budget constraint are also analyzed. Section III shows that our attitudes toward the non- coordination problem may be quite different depending on why policies were not coordinated to begin with, and argues that there are plausible circumstances under which it may be better to have uncoordinated policies. Section IV turns to the design of a coordination system. The game-theoretic aspects of having two independent authorities are stressed, and I offer a general reason to expect that uncoordinated behavior will result in tight money and loose fiscal policy even when both parties would prefer easy money and tight fiscal policy. Finally, Section V considers the old "rules versus discretion" debate from the particular perspective of this paper.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0982.

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Date of creation: Sep 1982
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Publication status: published as in "Monetary Policy Issues in the 1980s", pp. 3-34. Kansas City: Federal Reserve Bank of Kansas City.
Handle: RePEc:nbr:nberwo:0982
Note: EFG
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  1. Martin Feldstean, 1980. "Tax Rules and the Mismanagement of Monetary Policy," NBER Working Papers 0422, National Bureau of Economic Research, Inc.
  2. Feldstein, Martin, 1982. "Government deficits and aggregate demand," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 1-20.
  3. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  4. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
  5. Blinder, Alan S, 1981. "Temporary Income Taxes and Consumer Spending," Journal of Political Economy, University of Chicago Press, vol. 89(1), pages 26-53, February.
  6. Pyle, David H & Turnovsky, Stephen J, 1976. "The Dynamics of Government Policy in an Inflationary Economy: An "Intermediate-Run" Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(4), pages 411-37, November.
  7. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  8. McCallum, Bennett T, 1981. "Monetarist Principles and the Money Stock Growth Rule," American Economic Review, American Economic Association, vol. 71(2), pages 134-38, May.
  9. Smith, Gary, 1982. "Monetarism, Bondism, and Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(2), pages 278-86, May.
  10. Alan J. Auerbach & Laurence J. Kotlikoff, 1981. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Working Papers 0729, National Bureau of Economic Research, Inc.
  11. Bennett T. McCallum, 1982. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," NBER Working Papers 0905, National Bureau of Economic Research, Inc.
  12. Ben S. Bernanke, 1981. "Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data," NBER Working Papers 0756, National Bureau of Economic Research, Inc.
  13. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February.
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