Fiscal and Monetary Policy: interaction and the sustainability of public debt

Problems of the utmost concern that are often faced by both developing and developed \ncountries are those of inflation, the budget deficit and the accumulated public debt. It is believed \nthat the main reason for high inflation in most developing countries and countries with \ntransition economies is the financing of the budget deficit by seigniorage. This means that \nin most such cases it is the budget deficit that is responsible for high inflation. From time to \ntime tensions that had accumulated in the fiscal sphere and mistakes that had been made in \nmonetary policy have serious consequences, such as hyperinflation or a debt crisis. \nThe government and the central bank are interconnected by a consolidated public sector \nbudget constraint: the operational deficit of the budget is financed by new borrowings and by \nseigniorage. On one hand, the central bank, which controls money emission, has an important \ngoal to achieve, namely a low and stable level of inflation. On the other hand, the central \nbank must also be concerned about the stability of the financial system, and in particular \nabout the sustainability of the public debt. This means that, even given the central bank’s formal \nindependence of the government, the former must nevertheless take into account problems \nin the fiscal sphere and cover a certain part of the budget deficit by seigniorage. In other \nwords, the policies of the government and of the central bank interact with each other. \nThis work covers a series of questions which are of principle concern in the analysis of the \ninteraction between fiscal and monetary policies.