Economic Brief

2012

 

July 2012, No. 12-07

Unsustainable Fiscal Policy: Implications for Monetary Policy

Renee Haltom and John A. Weinberg

The debt of the U.S. government is at historically high levels, but how do we know whether debt levels are worrisome? This Economic Brief argues that the current fiscal position is not sustainable. Though financial markets seem unconcerned, for the time being, about U.S. fiscal health, as evidenced by low rates on Treasury securities, lawmakers should not be complacent. Expectations are liable to change as large fiscal imbalances persist, with potentially devastating consequences for the U.S. economy and monetary policy.

Additional Resources

"2012 Long-Term Budget Outlook," Congressional Budget Office, June 5, 2012.

Haltom, Renee, and John A. Weinberg, "Unsustainable Fiscal Policy: Implications for Monetary Policy," Federal Reserve Bank of Richmond 2011 Annual Report.

Krause, Michael U., and Stéphane Moyen, "Public Debt and Changing Inflation Targets," Deutsche Bundesbank, April 29, 2011.

Lacker, Jeffrey, "Understanding the Interventionist Impulse of the Modern Central Bank," Speech at the Cato Institute 29th Annual Monetary Conference, Washington D.C., November 16, 2011.

Leeper, Eric M., "Monetary Science, Fiscal Alchemy," Paper presented at the Kansas City Fed Economic Policy Symposium at Jackson Hole, August 2010.

Sargent, Thomas J., and Neil Wallace, "Some Unpleasant Monetarist Arithmetic," Federal Reserve Bank of Minneapolis Quarterly Review, Fall 1981, vol. 5, no. 3, pp. 1-17.

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