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Marching to Different Drummers: Coordination and Independence in Monetary and Fiscal Policies

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Abstract

Most countries have recently experienced high fiscal deficits and real interest rates that depressed national saving and slowed economic growth. This study analyzes the reasons that underlie the skewed fiscal-monetary mix. The first section develops a game-theoretic model of fiscal and monetary coordination and shows that the macroeconomic outcomes depend upon the degree of coordination or independence. The second section applies this approach to the Clinton package by using three macroeconomic models to estimate the likely macroeconomic impacts of different degrees of coordination. The paper concludes that an uncoordinated policy may lead to substantial loss of output that will not be offset by higher potential output growth for many years. This implies that the potential gains from coordination are extremely high.

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  • William D. Nordhaus, 1994. "Marching to Different Drummers: Coordination and Independence in Monetary and Fiscal Policies," Cowles Foundation Discussion Papers 1067, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1067
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    References listed on IDEAS

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    1. Fair, Ray C, 1993. "Testing Macroeconomic Models," American Economic Review, American Economic Association, vol. 83(2), pages 287-293, May.
    2. Alan S. Blinder, 1982. "Issues in the Coordination of Monetary and Fiscal Policy," NBER Working Papers 0982, National Bureau of Economic Research, Inc.
    3. Robert S. Pindyck, 1976. "The Cost of Conflicting Objectives in Policy Formulation," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 2, pages 239-248, National Bureau of Economic Research, Inc.
    4. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
    5. Stephen K. McNees, 1986. "Modeling the Fed: a forward- looking monetary policy reaction function," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-8.
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    Cited by:

    1. Jagjit S Chadha & Luisa Corrado & Jack Meaning, 2012. "Reserves, liquidity and money: an assessment of balance sheet policies," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 294-347, Bank for International Settlements.
    2. COMBEY, Adama & NUBUKPO, Kako, 2013. "Coordination des Politiques Economiques au Sein de la Zone UEMOA : Bilan et Perspectives [Economic Policy Coordination in the WAEMU: Results and Prospects]," MPRA Paper 58118, University Library of Munich, Germany, revised Aug 2014.
    3. GAMMADIGBE, Vigninou, 2015. "Indice de cohérence du policy-mix : une proposition [Policy-mix coherence index : a proposal]," MPRA Paper 63286, University Library of Munich, Germany.
    4. GAMMADIGBE, Vigninou, 2015. "Policy Mix Coherence Index (PMCI) : A Proposal," MPRA Paper 63583, University Library of Munich, Germany.
    5. Andrei HREBENCIUC, 2013. "The lack of consistency in budget deficit criteria in the Stability and Growth Pact," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(578)), pages 63-72, January.

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