Unsustainable Fiscal Policy: Implications for Monetary Policy

Federal government debt held by the public reached 67.7 percent of gross domestic product in 2011 and trends point to large budget deficits for many years to come. In this essay, Renee Haltom and John Weinberg explore the implications for monetary policy if the United States ever approached its fiscal limit. In that scenario, the Federal Reserve might face pressure to produce inflation revenue. The authors conclude that the United States must avoid this scenario by placing fiscal policy on a more sustainable path.