Interaction between Monetary and Fiscal Policy and the Policy Mix, Theoretical Consideration and Japanese Experience

Yasushi Iwamoto

No CARF-F-043, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: Interactions between monetary and fiscal policy depend on the specification of policy variables that fiscal policy uses. However, a general rule is that when monetary policy is capable of dealing with sticky price adjustment, a primary concern of fiscal authority should be to remedy the resource allocation. My regression study using cross-country data shows that in a majority of OECD countries fiscal policy relies on the automatic stabilizer. Japan is a unique case in that it relies heavily on discretionary fiscal policy. However, Japanese policymakers have recently changed their thinking regarding fiscal policy.

Pages: 41 pages
Date: 2005-09
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Working Paper: Interaction between Monetary and Fiscal Policy and the Policy Mix, Theoretical Consideration and Japanese Experience (2005)
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