Interactions between fiscal and monetary policies: a brief history of a long relationship

Abstract

This paper compares and contrasts interactions between monetary and fiscal policies in major economies following the recent pandemic recession with selected episodes from the past, notably the Great Inflation of the 1970s, the Great Moderation of the 1990s, and the Great Financial Crisis and its aftermath. Interactions between fiscal and monetary policies in these periods were characterised respectively by the collapse of consensus about fiscal dominance, strict separation of monetary and fiscal policies, and intermittent close coordination. The paper tentatively argues that a consensus on the “new normal” for the two policies is unlikely to emerge in the near term.

Keywords

• fiscal policy; monetary policy; policy coordination; policy interactions; fiscal dominance; pandemic recession; macroeconomic stabilisation