The Prospect of Fiscal Dominance in the United States: A New Quantity Theory Perspective

Abstract

The U.S. national debt is now near 100 percent of GDP and is expected to double that by 2050, according to the Congressional Budget Office. This change in U.S. public finance has some observers worried that a regime of fiscal dominance may soon emerge, making monetary policy subservient to fiscal policy. This paper provides an alternative interpretation of these facts: the elevated debt-to-GDP alongside well-anchored inflation expectations reflects an elevated real demand for government securities. This interpretation can be shown using a New Quantity Theory that falls out of the recent work on the Fiscal Theory of the Price Level with a bubble.