Economics

Fiscal policy can affect monetary policy through different channels. Sargent and Wallace (1981) first pointed out that, in a so-called “fiscal dominant” regime, where the fiscal authority sets its budget independently of public sector liabilities, a fiscal expansion may eventually require monetisation, and result in higher inflation. Fiscal policy has an impact on inflation also through its effects on aggregate demand. Recently, models of the fiscal theory of the price level have even suggested that fiscal policy can be the main determinant of inflation. Furthermore, fiscal policy influences other monetary variables, notably interest rates, exchange rates and interest spreads. Furthermore, fiscal and monetary policies’ coordination forms the key prerequisite for macroeconomic stability and sustainable economic growth. Moreover, the leading social and economic development objectives are practically unachievable through the monistic application of fiscal or monetary regulation in the long-run. Over a relatively extended period, fiscal dominance or monetarism formed the basis for the development policy in advanced economies. The practical experience confirmed the reasonableness of those scientific concepts’ convergence in close interaction between fiscal and monetary policy, especially in a recession. Those policies’ insufficient coherence leads to significant destructive economic consequences. Well-coordinated fiscal and monetary regulation measures combined with low quality of institutions deteriorate the public financial policy’s efficiency. It is essential to apply them harmoniously and complexly, analyzing the relevant causal relationships. Exercising their functional powers, fiscal and monetary institutions have crucially different goals. However, the central economic policy aims to increase public welfare and is familiar to all public policy elements.

Tilastotiede Antitrust Economics

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