Monetary/Fiscal Policy Mix and AgentsBeliefs

We estimate a model for the US economy with monetary /\u85 scal policy mix changes. Monetary policy accommodated \u85scal policy through the 60s-70s leading to high ination. Monetary policy changed with Volcker, but ination dropped only when \u85scal policy accommodated this switch; successful disinations require \u85scal backing. If the monetary authority had always led or if agents had been con\u85dent about this switch, the Great Ination would not have occurred. The policy change explains why, in the 80s, ination dropped, debt-to-GDP reversed, output fell, and ination persistence and volatility declined. Absent this change, ination would have remained high for \u85fteen years