Monday, March 12, 2012

Excellent post from Brad DeLong on fiscal policy

Here. This was particularly good:

"Whenever there are problems of monetary policy commitment, the doctrine of fiscal dominance suggests that expansionary fiscal policy can help resolve them. The larger the debt, the larger the absolute amount of debt amortization that an optimizing central bank will perform via seigniorage, and the higher the price level and the inflation rate. [5] Fiscal dominance--having the fiscal authority set current borrowing and future primary surpluses and requiring the monetary authority to print money to fill in the gap--can make fiscal policy extraordinarily powerful. For example, consider the model of Cochrane (2010) [6], in which a 1% increase in the national debt leads to a 1% increase in nominal spending not just this year but in all future years. If monetary expansion via quantitative easing is not credible as a commitment to looser future monetary policy because the easing transactions can be easily unwound, fiscal expansion funded by money-printing is a credible commitment to looser future monetary policy because there is no easy way for the government in the future to sell off its bridges and dispossess its citizens of the human capital bought and thus to unwind the monetary expansion."

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