We illustrate how market data can be informative about the interactions between monetary and fiscal policy. Federal funds futures are private contracts that reflect investor’s expectations about monetary policy decisions.
Central banks in many advanced economies enjoy a high degree of independence, which protects monetary policy decisions from political influence. But how should independent central banks react if pressured by fiscal policy-makers? We examine whether a central bank should design a monetary policy framework that prescribes acting conditionally on how fiscal policy behaves.
