"Whether this larger fiscal deficit leads to an increase in prices depends on monetary conditions. If the fiscal deficit is not accompanied by an increase in the money supply, the fiscal stimulus will raise short-term interest rates, blocking the increase in demand and preventing a sustained rise in inflation."
It is hard to know where to begin with his analysis since he makes no mention of the internationalization of the dollar and that Asian nations are essentially running as dollar-based economies. There is a reason why no one stands around any more waiting for weekly money growth numbers and why the Fed stopped publishing targets for M's. No one really knows how to read money growth in the current era.
While his basic economics is obviously right Prof. Feldstein fails, in my humble opinion, to grasp the signposts indicating inflation ahead by ignoring international capital flows. We do not live in a closed economy. He also confines inflation to the cost of goods and services and hence makes the same mistake Greenspan/Bernanke did in ignoring accelerating prices of assets. The claim that bubble management is beyond the scope of the Fed (What is beyond its scope today?) is true only in the narrow definition of management. What the Fed has the scope and obligation to do is keep credit growth from growing too rapidly. Until that becomes the Fed's focus, keeping the policy eyes on inflation indexes of dubious value will get us back into the same soup we are in now -- especially if our major trade deficit countries sustain current dollar policies.