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Coordinating monetary and fiscal policies: a role for rules?

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  • Goyal, Ashima

Abstract

The chapter argues for rules to coordinate monetary and fiscal policies. But the rules are rule like only in imposing forward-looking behaviour, while they allow the discretion to respond to shocks. They would serve to anchor expectations, and align private sector actions with desired outcomes. Many countries have used rules, but credible rules have to be suited to a country’s circumstances, which include both structure and political economy. These aspects help to explain past policy choices and outcomes in India, such as the relatively low inflation, even though monetary policy was not autonomous. Prices were kept down partly through administrative measures and subsidy schemes. This led to distortions that lowered efficiency and growth. The constraints need to be stricter for fiscal compared to monetary policy, in order to restrain the competitive populism of elected governments. If fiscal-deficit zone targeting restrains government consumption expenditure while protecting essential expenditure on physical and human capital, it would become possible to lower Indian real interest rates closer to world levels. Recent advances in the theory of monetary policy show how the CB can influence the real interest rate in the short- to medium-run, taking account of expected inflation in setting nominal interest rates while smoothing the latter. Exchange rate policy could also be further fine-tuned to fulfil the objectives of stabilising prices, stimulating exports, and preventing a currency crisis. Since accountability, in a democratic polity, forces the CB to keep inflation low, a weak constraint on the CB, such as medium-term inflation zone targeting, is credible. This would allow productivity improvement to decrease inflation, under expanding potential output.

Suggested Citation

  • Goyal, Ashima, 2002. "Coordinating monetary and fiscal policies: a role for rules?," MPRA Paper 29200, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:29200
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    File URL: https://mpra.ub.uni-muenchen.de/29200/1/MPRA_paper_29200.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ashima Goyal, 2014. "History of Monetary Policy in India Since Independence," SpringerBriefs in Economics, Springer, edition 127, number 978-81-322-1961-3, March.
    2. Goyal, Ashima, 2006. "Macroeconomic policy and the exchange rate: working together?," MPRA Paper 27768, University Library of Munich, Germany.
    3. Ashima Goyal, 2005. "Incentives from exchange rate regimes in an institutional context," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2005-002, Indira Gandhi Institute of Development Research, Mumbai, India.
    4. Ashima Goyal, 2005. "“Incentives from Exchange Rate Regimes in an Institutional Context"," Macroeconomics Working Papers 22370, East Asian Bureau of Economic Research.
    5. Ashima Goyal & A. K. Jha, 2005. "Dictatorship, Democracy and Institutions: Macropolicy in China and India," Working Papers id:264, eSocialSciences.
    6. Goyal, Ashima, 2003. "Budgetary processes: a political economy perspective," MPRA Paper 27786, University Library of Munich, Germany.
    7. Kamal, Mona, 2010. "الإطار النظرى للتنسيق بين السياستين المالية والنقدية
      [The Theoretical Framework for the Coordination of Fiscal and Monetary Polices]
      ," MPRA Paper 26856, University Library of Munich, Germany.

    More about this item

    Keywords

    monetary fiscal policy coordination; rules; constrained discretion;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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