Chapter 15 Monetary - Fiscal Interactions

In this section, we briefly explore some issues surrounding the interactions between monetary policy and fiscal policy. In developed countries, monetary-policy-setting is effectively “independent” from fiscal-policy-setting, in the sense that separate authorities control the two types of policy-making. For example, Federal Reserve policy-makers are not the same as Congressional policy-makers. Even in a country where institutional arrangements seemingly insulate monetary and fiscal policy from each other, however, the conduct of each has bearing on the optimal choices of the other. Casual observation makes this point seem relatively obvious – for example, it is not rare to hear a central bank worry about the implications of fiscal deficits for inflation and its consequences for its own policy-setting.