{"title":"Is monetary and fiscal policy conflict that dire?","authors":"Jeremy Kronick , Luba Petersen","doi":"10.1016/j.jedc.2024.104982","DOIUrl":null,"url":null,"abstract":"<div><div>Theory predicts that inflation can become unstable when policymakers are in conflict about their post-recession recovery strategies, with the fiscal authority actively borrowing and spending to stimulate economic growth while the monetary authority raises interest rates to tame inflation. Such policy conflict can generate a debt-inflation spiral when agents are forward-looking. We show that the dire effects of policy conflict are less concerning when agents form backward-looking expectations. We then test this prediction in a learning-to-forecast experiment. Our results suggest that policy conflict does not necessarily lead to worse economic outcomes. This finding is driven by the fact that agents rely mostly on recent macroeconomic trends to formulate their expectations and do not meaningfully factor the government debt level or future regime shifts into their expectations.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"172 ","pages":"Article 104982"},"PeriodicalIF":1.9000,"publicationDate":"2024-11-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Economic Dynamics & Control","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S016518892400174X","RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
Theory predicts that inflation can become unstable when policymakers are in conflict about their post-recession recovery strategies, with the fiscal authority actively borrowing and spending to stimulate economic growth while the monetary authority raises interest rates to tame inflation. Such policy conflict can generate a debt-inflation spiral when agents are forward-looking. We show that the dire effects of policy conflict are less concerning when agents form backward-looking expectations. We then test this prediction in a learning-to-forecast experiment. Our results suggest that policy conflict does not necessarily lead to worse economic outcomes. This finding is driven by the fact that agents rely mostly on recent macroeconomic trends to formulate their expectations and do not meaningfully factor the government debt level or future regime shifts into their expectations.
期刊介绍:
The journal provides an outlet for publication of research concerning all theoretical and empirical aspects of economic dynamics and control as well as the development and use of computational methods in economics and finance. Contributions regarding computational methods may include, but are not restricted to, artificial intelligence, databases, decision support systems, genetic algorithms, modelling languages, neural networks, numerical algorithms for optimization, control and equilibria, parallel computing and qualitative reasoning.