2013-02-24 — bloomberg.com
"This unfavorable fiscal arithmetic might tend to push the Fed toward delaying its exit from the extraordinary easing measures it has taken in recent years; it could even affect decisions this year about how much further to expand the Fed's holdings of longer-term government securities," the authors said. "The Fed could cut its effective drain on the Treasury significantly by putting off asset sales and delaying policy rate increases. But such a response would presumably feed rising inflation expectations."
"The bottom line is that no matter how strong the commitment of a central bank to an inflation target, fiscal dominance can override it," the authors of today's paper warned. "Without long-run fiscal sustainability, no central bank will be able to keep inflation low and stable."
Fiscal dominance refers to a situation in which a central bank is forced to purchase government debt and finance deficits through inflation.
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