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The Exchange Rate Between Monetary and Fiscal Policy: What Is an Interest Rate Cut Worth?

Author

Listed:
  • Nielsson, Ulf
  • Rangvid, Jesper Rangvid
  • Saidi, Farzad
  • Seyrich, Fabian
  • Streitz, Daniel

Abstract

When monetary policy is constrained, how large a fiscal transfer substitutes for a given interest rate cut? Using full-population Danish administrative data, we estimate household consumption responses to adjustable-rate mortgage resets and to unanticipated cash inheritances. A 1 percentage point rate cut maps to uniform transfers of approximately $1,000 per person over 5 years, totaling 1.3% of GDP. These macro-equivalent policies operate through distinct balance-sheet channels with different distributional incidence: rate cuts disproportionately stimulate high-income mortgage holders, while transfers are progressive. Marginal propensities to consume vary only modestly across income and liquid-wealth distributions, limiting efficiency gains from targeting.

Suggested Citation

  • Nielsson, Ulf & Rangvid, Jesper Rangvid & Saidi, Farzad & Seyrich, Fabian & Streitz, Daniel, 2025. "The Exchange Rate Between Monetary and Fiscal Policy: What Is an Interest Rate Cut Worth?," CEPR Discussion Papers 20499, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20499
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    Keywords

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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