Abstract
This paper studies how a crisis that induces a large negative fiscal shock and a strong demand for safe stores of value affects the independence of a central bank vis-a-vis a fiscal authority that seeks to inflate away public liabilities. We find that the central bank can maintain price stability only if there is a large demand for its liabilities, so that it can control the net increase in government debt held by the private sector. We show that fiscal requirements are necessary even with low interest rates and massive reserve issuance is not necessarily a sign of fiscal dominance.
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