Тhe Interactions Between Monetary and Fiscal Policy: A Survey

This paper surveys the theoretical and empirical literature on the coordination between monetary and fiscal policies. Recently, theoretical literature has been dominated by the Fiscal theory of the price level, which argues that fiscal policy plays at least equal role in the conduct of stabilization policy. Similarly, the game-theoretic approach appeals for a close coordination between the two policies, showing that the lack of coordination may result in over-reaction of the individual policy makers with suboptimal economic outcomes. Recently, the Global crisis has emphasized the ineffectiveness of traditional monetary policy tools with a strong message that, in deep recessions, part of the stabilization burden must be borne by fiscal policy. Yet, massive fiscal stimuli implemented throughout the world have raised some serious concerns about their macroeconomic consequences in the medium-term due to the sustainability of public debt, the crowding-out effects, and the behaviour of Ri...