Strategic Interactions in U.S. Monetary and Fiscal Policies

We estimate a model in which fiscal and monetary policy obey the targeting rulesof distinct policy authorities, with potentially different objective functions. Wefind: (1) Time-consistent policy fits U.S. time series at least as well as instrument-rules-based behavior; (2) American policies often do not conform to the conven-tional mix of conservative monetary policy and debt-stabilizing fiscal policy, al-though economic agents expect fiscal policy to stabilize debt eventually; (3) Evenafter the Volcker disinflation, policies did not achieve that conventional mix, asfiscal policy did not begin to stabilize debt until the mid 1990s; (4) The high in-flation of the 1970s could have been effectively mitigated by either a switch to afiscal targeting rule or an increase in monetary policy conservatism; (5) If fiscalbehavior follows its historic norm to eventually stabilize debt, current high debtlevels produce only modest inflation; if confidence in those norms erodes, highdebt may deliver substantially more inflation.