Commentary: Monetary Policy Implications of Greater Fiscal Discipline

Discussions of fiscal policy often originate with central banks. This conference is organized by one; the Bank of England was created to help the British government finance its deficit; and it was in the Federal Reserve Bank of Minneapolis’ Quarterly Review that in 1981, Tom Sargent and Neil Wallace published their well-known article “Some Unpleasant Monetarist Arithmetic.” Their basic proposition was that if the fiscal authority sets its budgets independently of the monetary authority, then the latter might be forced to tolerate a higher inflation rate than it would prefer in order to generate sufficient revenue from seigniorage to satisfy the government budget constraint.