Yes, indeed they are. Some of the key insights in our understanding of the link between fiscal and monetary policies were articulated in an influential 1981 paper by Thomas Sargent, an economist at NYU and 2011 Nobel laureate, and by Neil Wallace, an economist at Penn State.

Arguably, one of the main roles of any central bank (e.g., the Federal Reserve) is to manage the inflation rate. Inflation erodes the real value of nominal assets and is, therefore, costly to society. However, when a government issues bonds in its own currency, inflation alleviates the financial burden of inherited debt. Thus, central banks have a natural incentive to finance past deficits by using inflation to reduce the real value of government debt.

When a fiscal authority (e.g., the Treasury Department) evaluates how to finance its obligations with taxes and debt, it takes into account its expectations about future monetary policy. In particular, issuing more debt today may induce the central bank to increase inflation tomorrow, which would make the new debt less financially burdensome. This bias toward deficit financing is mitigated (and even overcome) by the fact that higher expected inflation translates into lower demand for bonds and, thus, higher interest rates.