Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/200563 
Year of Publication: 
2017
Series/Report no.: 
Working Paper No. 2017-19
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
What happens if the government's willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.
Subjects: 
Monetary and fiscal policies
coordination
emergency budget
Markov-switching models
liquidity traps
JEL: 
E31
E52
E62
E63
D83
Document Type: 
Working Paper

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