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

Mitsuru Katagiri, Yusuke Oh, Yasutaka Ogawa, Nao Sudo and Takeki Sunakawa
Additional contact information
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)

No 24-E-12, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

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.

Keywords: Taylor rule; fiscal multipliers; interest rates and government debt; fiscal theory of the price level (search for similar items in EconPapers)
JEL-codes: E12 E21 E31 E52 E62 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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