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On the Interaction between Monetary and Fiscal Policy: Developments in Macroeconomics since the Global Financial Crisis

Author

Listed:
  • Mitsuru Katagiri

    (Associate Professor, Faculty of Business Administration, Hosei University (E-mail:mitsuru.katagiri@hosei.ac.jp))

  • Yusuke Oh

    (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuusuke.ou@boj.or.jp))

  • Yasutaka Ogawa

    (Director, Financial System and Bank Examination Department, Bank of Japan (E-mail: yasutaka.ogawa@boj.or.jp))

  • Nao Sudo

    (Associate Director-General, Financial System and Bank Examination Department, Bank of Japan (E-mail: nao.sudo@boj.or.jp))

  • Takeki Sunakawa

    (Associate Professor, Faculty of Economics, Hitotsubashi University (E-mail: t.sunakawa@r.hit-u.ac.jp))

Abstract

In macroeconomics, fiscal and monetary policies are both viewed as important macro policy tools for stabilizing aggregate demand, and their transmission channels and effects are considered to interact with each other. By adjusting interest rates, monetary policy can affect the extent to which the intertemporal substitution of aggregate demand occurs and thus alter the size of fiscal multipliers. These adjustments can also impact government debt accumulation through changes in interest payments. Conversely, fiscal policy and resulting government debt levels, just like other economic and social environments, can influence the transmission and impact of monetary policy by affecting the decision- making of households and firms. In addition, some theories posit that primary fiscal balance dynamics themselves impact the determination of the aggregate price level. Academic interest in the interaction of the two policies has intensified, sparked by debates on how stimulative policies should be executed in response to the global financial crisis and inflation surges after the COVID-19 pandemic. This paper overviews recent macroeconomic studies on monetary and fiscal policy interactions mainly from three perspectives: the Taylor rule and fiscal multipliers, interest rates and government debt, and the fiscal theory of the price level.

Suggested Citation

  • Mitsuru Katagiri & Yusuke Oh & Yasutaka Ogawa & Nao Sudo & Takeki Sunakawa, 2024. "On the Interaction between Monetary and Fiscal Policy: Developments in Macroeconomics since the Global Financial Crisis," IMES Discussion Paper Series 24-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:24-e-12
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    More about this item

    Keywords

    Taylor rule; fiscal multipliers; interest rates and government debt; fiscal theory of the price level;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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