Anchors Away: How Fiscal Policy Can Undermine "Good" Monetary Policy

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Executive Summary

Slow moving demographics are aging populations around the world and pushing many countries into an extended period of heightened fiscal stress. In some countries, taxes alone cannot or likely will not fully fund projected pension and health care expenditures. If economic agents place sufficient probability on the economy hitting its "Fiscal limit" at some point in the future, after which further tax revenues are not forthcoming, it may no longer be possible for "Good" monetary policy - behavior that obeys the Taylor principle - to control inflation or anchor inflation expectations.

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