Abstract

This paper considers whether monetary and fiscal policy may sensibly be formulated independently of one another, and argues that the reasons for the two to be interconnected go well beyond the familiar but unappealing possibility of using seignorage as a source of revenue for the government. Particular attention is given to the e#ects of fiscal policy upon the price level through the wealth e#ect of variations in the value of the public debt; such e#ects are shown to be consistent with rational expectations and frictionless financial markets, contrary to the doctrine of "Ricardian equivalence", in the case of "non-Ricardian" fiscal policy. In this case, the e#ects of variation in the composition of the public debt (as to maturity and degree of indexation) are considered, as well as the e#ects of growth in its overall size. A number of objections to the possibility of a non-Ricardian policy are considered, notably the assertions that it is not possible for a government to ref...

Citations