The Difficulties of Coordinating Monetary and Fiscal Policies in the Modern Economy
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Publication date: 2006-09-30
GNPJE 2006;210(9):57-75
The paper examines issues related to the coordination of fiscal and monetary policies. The author discusses the implications of delayed monetary and fiscal decisions and the difficulties involved in setting economic policy goals. He also describes the “one-armed policymaker” syndrome and the “zero bound problem.” The discussion indicates that proper coordination makes it possible to limit delays in economic policy. It also offsets the shortage of instruments at the disposal of policy makers and helps prevent deflation pressure, while increasing the efficiency of economic policy under “the zero bound problem.” All this increases the probability that monetary and fiscal policy makers will successfully attain their goals. The author concludes that the relationships between monetary and fiscal policies are much deeper and more complex than they seem to be, going beyond their traditional perception in terms of inflation and budget deficit financing. Moreover, considering the limitations of fiscal policy that reduce its flexibility, coordination efforts should primarily support the position of the central bank as a prime decision maker with considerable room for maneuver. Fiscal authorities should essentially limit themselves to supporting central bank activities and pursuing well-designed policies.
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