Once I do so, it will become clear that a sufficiently tough central bank does have the ability to control the price level, regardless of the behavior of the fiscal authority.3 I will argue that its ability to do so hinges on the nature of its response to the possibility of default on the part of the fiscal authority.
I will talk about some of the short-run versus long-run tensions involved in that response. Throughout, I will refer to the central bank as CB and the fiscal authority as FA. I will refer to the currency as being dollars, but that should not be viewed as suggesting that I am talking about the United States – or Australia. 1  See Cochrane (2005).