Monetary Science, Fiscal Alchemy ∗

By Eric M. Leeper. 2010

142 citations recorded by the source corpus.

Monetary policy decisions tend to be based on systematic analysis of alternative policy choices and their associated macroeconomic impacts: this is science. Fiscal policy choices, in contrast, spring from unsystematic speculation, grounded more in politics than economics: this is alchemy. In normal times, fiscal alchemy poses no insurmountable problems for monetary policy because fiscal expectations can be extrapolated from past fiscal behavior. But normal times may be coming to an end: aging populations are causing promised government old-age benefits to grow relentlessly and many governments have no plans for financing the benefits. In this era of fiscal stress, fiscal expectations are unanchored and fiscal alchemy creates unnecessary uncertainty and can undermine the ability of monetary policy to control inflation and influence real economic activity in the usual ways.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/608767036fbe3dc9d2f52a6f5fbcad73898db901

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Citations in the corpus

Rules and risk in the Euro area (2014, result): “The views expressed in this paper are those of the authors and do not necessarily represent those of the European Commission. trust of investors in such a commitment may be enhanced by a strong scal framework (Fatás, 2010) and the framework may help anchor scal policy expectations (Leeper, 2010).”
Fiscal Rules and the Sovereign Default Premium (2022, unknown): “It is often recognized that fiscal policy frameworks lack an anchor to manage expectations about future policies, unlike frameworks used for monetary analysis, where such anchors play a key role (Leeper, 2010).”
The output effect of fiscal consolidation plans (2015, background): “The problem that arises when analyzing fiscal plans (as clearly illustrated in Leeper et al 2008 and Leeper 2010) is that fiscal foresight – the fact that agents are informed of announced, but not yet realized, shifts in fiscal variables – causes a misalignment between the information set used by…”
Measuring Tax Multipliers: The Narrative Method in Fiscal VARs † (2012, background): “We thank Daron Acemoglu, Fernando Alvarez, Marios Angeletos, Olivier Blanchard, Eric Leeper, Guido Lorenzoni and Roberto Perotti for their comments.”
How large is the Government Spending Multiplier? Evidence from World Bank Lending (2010, background): “As emphasized by Leeper (2010), government spending multipliers based on calibrated theoretical models summarize a complex array of factors, including the type of spending involved, the time path of spending, and the nature of the taxes that ultimately will be used to finance the spending increases.”
Inflation and the Fiscal Limit (2010, background): “Much of the recent discussion of fiscal policy centers on fiscal retrenchment (see, Leeper, 2010).”
The (impossible) repo trinity: the political economy of repo markets (2016, background): “With the loss of epistemic authority, Treasuries increasingly accepted the ‘monetary science, fiscal alchemy’ account of mainstream macroeconomics (Leeper, 2010).”