Discordances between fiscal policy and monetary policy – major issue for the emergent countries

Abstract

This is a topic on which there is an abundance of literature. Books are filled with information on the topic of the interaction between monetary and fiscal policies, which is one of the key, but also one of the more complex, relationships in economic theory. With the role of the central bank lawyer in mind, the discussion below will address the issue from one specific angle, namely the relevance of fiscal policy for central bankers. In the last few years‘ papers have begun to analyze optimal monetary and fiscal policy in models incorporating nominal rigidities where social welfare is derived from the utility of agents. This article examines whether this analysis provides support for the consensus assignment, where monetary policy controls demand and inflation and fiscal policy controls government debt. In this article, we review positive and normative issues in the interaction between monetary and fiscal policy, with an emphasis on how views on policy coordination have changed over the last years. On the positive side, no cooperative games between a government and its central bank have given way to an examination of the requirements on monetary and fiscal policy to provide a stable nominal anchor. On the normative side, cooperative solutions have given way to emergency loans allocations. The central theme throughout is on the optimal degree of price stability and on the coordination of monetary and fiscal policy that is necessary to achieve it.