US monetary and fiscal policies – conflict or cooperation?
About the ESRI Seminar Series
The ESRI organises a public seminar series, inviting researchers from both the ESRI and other institutions to present new research on a variety of public policy issues. The seminar series provides access to specialised knowledge and new research methodologies, with the objective of promoting research excellence and facilitating productive dialogue across the policy and research fields.
Guest Speaker: Campbell Leith, Professor of Macroeconomics, University of Glasgow
In this seminar series the speaker will present a paper which estimates how monetary and fiscal policy in the US have evolved since the 1950s until the financial crisis:
Most of the literature estimating DSGE models for monetary policy analysis ignores fiscal policy and assumes that monetary policy follows a simple rule. In this paper we allow both fiscal and monetary policy to be described by policy rules and/or optimal policy which are subject to switches over time. We find that US monetary and fiscal policy have often been in conflict, and that the US hasn’t convincingly achieved the conventional policy combination of a conservative monetary policy paired with a debt stabilizing fiscal policy. In a series of counterfactuals, we re-examine three broad trends in macroeconomic policy outcomes – the fall in the debt to GDP ratio and rise in inflation prior to the 1980s, the subsequent disinflation and rising debt to GDP ratio during the 1980s, and the stabilisation of the debt to GDP ratio from the mid-1990s until the financial crisis. We show how these trends are driven by shifts in monetary and fiscal policy, and explore how these trends and the underpinning fiscal financing mix would have differed under alternative policy configurations. Finally, we explore the welfare implications of alternative policies and find that a conservative central bank following a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy, but only if the regime is credible.
Campbell Leith co-authored the paper with Xiaoshan Chen, University of Durham, and Eric M. Leeper, Indiana University and NBER.
Campbell Leith is Professor of Macroeconomics at the University of Glasgow. He previously held research positions at the Universities of Exeter and Strathclyde. His research interests are in mainstream macroeconomics, with particular emphasis on monetary and fiscal policy issues, which led to him being appointed to Scotland’s fiscal council, the Scottish Fiscal Commission. He has held various editorial positions and has served on the last two RAE panels, the ESRC’s Grant Assessment Panel, and the Leverhulme Prize in Economics.