Monetary Policy and Fiscal Conditions: Interest Rates, Nominal Growth Rates, Tax Revenues, and Government Expenditures

Two main perspectives exist regarding the interaction between fiscal deficits and expansionary monetary policy. The first perspective argues that fiscal deficits raise interest rates, thereby increasing interest payments and complicating monetary stabilization efforts. The second posits that expansionary monetary policy enhances nominal GDP growth, which in turn reduces the government debt-to-GDP ratio and strengthens the fiscal position. Using panel data from the IMF World Economic Outlook covering advanced economies between 1980 and 2025, this study empirically evaluates which perspective is more consistent with observed data, while accounting for the dynamics of tax revenues, government expenditures, interest rates, and nominal GDP growth. Empirical evidence indicates that moderate monetary expansion—raising nominal GDP—tends to stabilize budget deficits, as government revenues generally outpace expenditures and interest rates do not increase proportionally with nominal growth. These results are further illustrated through case studies of Greece, Italy, Portugal, Spain, Japan, the United Kingdom, and the United States.