First, If one macro policy operates in isolation, it can be contradicted by ‘the other’ policy. This is especially relevant with monetary policy. In the past, expansive fiscal policy was often associated with monetary tightening (=not good, if you have spare capacity, low inf.)
Policy coordination, which ensures that monetary policy, and market rates, are not ‘fighting’ the fiscal policy can help solve this problem. =>coordination is good.
There has in the past been a debate around ‘fiscal multipliers’ and the notion that counter-cyclical monetary policy may work to reduce fiscal multipliers. This is a specific angle on this issue, as discussed by the CBO for example.
Another way to think about it, is that there may be declining marginal returns to certain policies. For example, if fiscal policy is focused on infrastructure there will be an initial set of ‘high return’ initial projects, and returns will decline from there.
Similarly, monetary easing has declining returns, the more maxed out the central bank is (and the easier financial conditions already are). This is an argument to combine the two policies, to maximize impact, achieve highest overall marginal returns.
Third, there is an argument that policy should have a shock effect, to impact expectations (which is crucial to inflation) the most. This was the argument behind Abenomics & while Abenomics has not been fully successful (perhaps in part due to VAT), the argument is a valid one
The argument is that the shock effect, and ability to move expectations, if you max / go aggressive on all policies at the same time
Fourth, coordinated monetary and fiscal easing will matter not just in terms of the contemporary impact, but also in relation to expectations for future coordination.
In the US, the Fed is currently committing to not raise rates preemptively in response to rising inflation expectations (under the AIT banner).
Coordination between fiscal and monetary policy can serve a similar purpose and anchor an easy monetary policy in the future even in the face of aggressive fiscal expansion, to ensure that monetary policy will not ‘work against’ fiscal policy at any point on the horizon.
Obviously, there are political constraints on all this, especially in democracies, where government changes. But that is a different debate. I will leave it at that. Expanding via fiscal and monetary together is good. END
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Ok, we are ready to officially launch our blog/substack called Money: Inside and Out. We have tested it and populated with 3 initial posts, and you can subscribe here:
One post, called "The Big Myth about Money and Inflation" touched on the conceptual misunderstandings around the link, and how the future may again shake things up, if monetary and fiscal expansion are (aggressively) combined.
Another post (from today) touched on the possibility of a liquidity crisis within the Eurosystem (written by our Advisor Chris Marsh aka @GeneralTheorist)
(apologies to my friends at Bloomberg news, including the ones involved in my interview earlier today, but.....)
Why have you changed all my menus to Spanish language while I was sleeping today?
[this was the language thing that broke the camels back...so now I will do a vent-thread]
why does the fingerprinting device on the keyboard only work 20% of the time, so that I have to fingerprint on the mobile B-unit another handful of time to simply get going, every day. I pay for the service, you can at least let me use it, hassle-free?!
The large majority of European countries have 'negative' momentum on covid cases now. But lockdown lite vs lockdown full makes a difference. We have big descents in France and the UK, vs mostly stabilization (but no strong descent) in Germany.
Also, we are still waiting for improvement (decline) in Germany's positivity ratio (hit ratio). We would expect Germany to eventually get on the path of Netherlands, with a clearer descent. But it is taking somewhat longer than expected.
The lockdown lite started 3 weeks ago, and it normally takes 2-3 weeks before results are visible. But the fact that policy makers are talking about extending the measures also shows that the descent has been surprisingly slow.
Second, it is not very helpful to have the Treasury and the Fed in open disagreement about this type of issue. This probably explains why markets reacted negatively.
There is a lag between cases & deaths, and as we see acceleration in cases, there is always a debate about whether fatalities will follow. That debate was there in the US second wave in the summer, in the European 2nd wave in recent weeks, & now again in the US 3rd wave