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

Ulf Nielsson, Jesper Rangvid Rangvid, Farzad Saidi, Fabian Seyrich and Daniel Streitz

No 20499, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Marginal propensity to consume; Monetary policy; Fiscal policy; Mortgages (search for similar items in EconPapers)
JEL-codes: D12 E21 E43 E52 E63 G51 H31 (search for similar items in EconPapers)
Date: 2025-07
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