Working Paper: NBER ID: w0982
Authors: Alan S. Blinder
Abstract: This paper examines issues in the current debate over coordination between fiscal and monetary policies. Section I1 uses the traditional targets-instruments approach to assess the potential gains from greater coordination. Since greater coordination is often equated with looser money and tighter fiscal policy, two econometric models of the economy are used to estimate the quantitative importance of the policy mix. Expectational effects that arise from the government budget constraint are also analyzed. Section III shows that our attitudes toward the non- coordination problem may be quite different depending on why policies were not coordinated to begin with, and argues that there are plausible circumstances under which it may be better to have uncoordinated policies. Section IV turns to the design of a coordination system. The game-theoretic aspects of having two independent authorities are stressed, and I offer a general reason to expect that uncoordinated behavior will result in tight money and loose fiscal policy even when both parties would prefer easy money and tight fiscal policy. Finally, Section V considers the old "rules versus discretion" debate from the particular perspective of this paper.
Keywords: monetary policy; fiscal policy; coordination
JEL Codes: E52; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greater coordination between monetary and fiscal policies (E61) | looser money and tighter fiscal policy (E62) |
| greater coordination between monetary and fiscal policies (E61) | expected positive outcomes (D84) |
| lack of coordination (P11) | tight money and loose fiscal policy (E62) |
| changes in the monetary-fiscal mix (E63) | significance of effects (C22) |