This paper describes interactions between monetary and fiscal policies that affect equilibrium price levels and interest rates by critically surveying theories about (a) optimal anticipated inflation, (b) optimal unanticipated inflation, and (c) conditions that secure a "nominal anchor'' in the...

Prior to elections, governments (at all levels) frequently undertake a consumption binge. Taxes are cut, transfers are raised, and government spending is distorted towards highly visible items. The "political business cycle" (better be thought of as "the political budget cycle") has been...

In this paper, we study Ramsey-optimal fiscal and monetary policy in a medium-scale model of the U.S.\ business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate...

This paper develops the view that monetary policy operates within a set of basic constraints that limit the set of outcomes that it can achieve.These include constraints on aggregate supply behavior that determine how a given path of nominal income growth will be divided between inflation and...

We argue that the question of whether and when policy reform works should be investigated together with the political economy factors responsible for distortionary policies in the first place. These not only determine the initial distortions, but also often shape policy in the post-reform...

An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange-rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation....

This paper argues, first, that it is inappropriate to presume that central banks will, in the absence of any tangible precommitment technology, inevitably behave in a `discretionary' fashion that implies an inflationary bias. Furthermore, there is no necessary tradeoff between `flexibility and...

This paper takes issue with two basic conclusions prevalent in the literature on central bank behavior. First, the paper argues that it is inappropriate to presume that central banks will, in the absence of any precommitment technology, necessarily behave in a 'discretionary' fashion that...