Are restrictions on fiscal policy necessary for monetary policy to be able to deliver price stability? When households are Ricardian, the net present value of future fiscal surpluses needs to equate the real value of government debt absent inflation. We show that when households are not Ricardian, fiscal requirements still exist but take the very different form of a limit on the debt-to-GDP ratio. The debt-to-GDP limit captures the idea that public debt cannot be so large that the wealth effect of public debt on aggregate spending can no longer be counter-balanced by interest rate hikes, however large. To implement price stability when the debt-to-GDP requirement is satisfied, monetary policy must respond to the level of public debt, not just to the inflation it creates.
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