The Interaction between Monetary and Fiscal Policies

Abstract

One can view the period since 1970 as one in which the authorities struggled to establish appropriate medium- term anchors for both monetary and fiscal policies. During this time, they learned about the appropriate interaction between those two policies in the context of economic stabilization and growth under a flexible exchange rate regime. This lecture deals with four interrelated topics: the appropriate goals for fiscal and monetary policy, building policy credibility, the appropriate stabilization role for the two policies, and policy cooperation. The transparent medium-term frameworks that have been established by the authorities will be extremely helpful in meeting the challenges that the future is sure to bring. These frameworks mean that the required adjustments in the economy will take place against a relatively stable background.

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