Fiscal and Monetary Policy Interaction

The government and the central bank are interconnected by a consolidated public sector budget constraint: the operational deficit of the budget is financed by new borrowings and by seigniorage. This means that, even given the central banks formal independence of the government, the former must nevertheless take into account problems in the fiscal sphere. Thus one of the fundamental problems in the analysis of macroeconomic policy is that of the interaction between the government and the central bank in conducting fiscal and monetary policies. The thesis continues this line of inquiry. It attempts to elucidate the most general problems which may in principle arise in describing the logic of this interaction. Various results pertain to the problems of macroeconomic policy in developed countries and in economies with undeveloped financial markets