Monetary policy can control inflation and boost economic output effectively.
The article explores how monetary policy with interest on reserves and a large balance sheet affects inflation and the economy. By using the fiscal theory of the price level, the researchers show that monetary policy can control interest rates and expected inflation. They find that higher interest rates can lead to increased output and inflation, but this requires coordinated fiscal and monetary policy actions. The study also discusses how current policies fit into historical contexts and predicts how optimal fiscal and monetary policies may change in the future.