need a quick reply: fiscal dominance
 

what is meant by the term fiscal dominance ....need a quick reply and will appreciate if someone could elaborate the term more appropriately

In the simplest characterisation of fiscal dominance, the fiscal position of the economy effectively ‘sets’ a target that monetary policy has to follow. Monetary policy plays a subordinate role, keeps interest rates low and allows inflation to erode the real value of government debt. By contrast, monetary dominance implies that fiscal policy plays a passive role while monetary policy goes about keeping inflation under control without a concern about the adverse effect of higher interest rates on the ability of governments to sustain the debt burden. Such a regime clearly existed before the onset of the Great Recession in the advanced economies (excluding Japan) and continues to exist in the emerging market economies even now. Since the Great Recession, however, things have changed.

Fiscal dominance isn’t a new concept. In 1981, one of this year’s Nobel Laureates, Thomas Sargent, and co-author Neil Wallace argued that trying to achieve too little inflation in a debt-ridden economy only meant inflation had to be ramped up further down the road to reduce the real debt burden.

More recently, the fiscal theory of the price level has argued that monetary policy needs to accommodate fiscal dominance by providing lower real interest rates as inflation rises. These papers spurred great debate, but the practical contribution of that research is going to be evident only now given that much of the developed world is in the clutches of sovereign risk and there is a prospect of many years of deleveraging of public debt.

Source: [url]http://www.morganstanley.com/views/gef/archive/2011/20111021-Fri.html[/url]