Monetary policy can be constrained by fiscal policy if fiscal deficits grow large enough to require monetization of government debt. That fact implies that the administrative independence of central banks does not by itself imply that monetary policy is independent of the fiscal decisions of governments. This essay describes limitations, possibilities, and suitable goals for monetary policy within the existing pattern of institutional responsibilities. The economic limitations of what can be achieved by monetary policy are summarized in six propositions developed in the paper.

. Mean dynamics describe the convergence to self-confirming equilibria of selfreferential systems under discounted least squares learning. Escape dynamics recurrently propel away from a self-confirming equilibrium. In a model with a unique self-confirming equilibrium, the escape dynamics make the government discover too strong a version of the natural rate hypothesis. The escape route dynamics cause recurrent outcomes close to the Ramsey (commitment) inflation rate in a model with an adaptive government. Key Words: Self-confirming equilibrium, mean dynamics, escape route, large deviation, natural rate of unemployment, adaptation, experimentation trap. `If an unlikely event occurs, it is very likely to occur in the most likely way.' Michael Harrison 1. INTRODUCTION Building on work by Sims (1988) and Chung (1990), Sargent (1999) showed how a government adaptively fitting an approximating Phillips curve model recurrently sets inflation near the optimal time-inconsistent ouctome, althoug...

This paper describes aspects of the French Revolution from the perspective of theories about money and government budget constraints. We describe how unpleasant fiscal arithmetic gripped the Old Regime, how the Estates General responded to reorganize France's fiscal affairs, and how fiscal exigencies impelled the Revolution into a procession of monetary experiments ending in hyper-inflation.

The introduction of the precious metals for the purposes of money may with truth be considered as one of the most important steps towards the improvement of commerce, and the arts of civilised life; but it is no less true that, with the advancement of knowledge and science, we discover that it would be another improvement to banish them again from the employment to which, during a less enlightened period, they had been so advantageously applied. —David Ricardo (1816)