Stabilizing Expectations under Monetary and Fiscal Policy Coordination

In the conditions of uncertainty and economic instability, the issue of researching approaches to strengthening the coordination of fiscal and monetary policy is becoming relevant. The aim of the research is to justify directions for strengthening the coordination of fiscal and monetary policy of Ukraine. It is hypothesized that the level of fiscal and monetary policy coordination determines the country’s ability to ensure macroeconomic stability. Special and general scientific methods were used: system approach, theoretical generalization, induction and deduction, statistical, scientific abstraction. Strengthening the coordination of fiscal and monetary policy is an important stabilization tool for ensuring the adaptation of the economy to social and economic conditions, curbing inflation in order to maintain exchange rate stability, reducing fundamental price pressure and directly overcoming inflationary processes. The toolkit of fiscal and monetary policy must be considered in an inseparable unity, taking into account the synergistic effect of ensuring macro­economic stability, which cannot be achieved exclusively by the tools of only one of the policies. The main directions of strengthening the coordination of the fiscal and monetary policy of Ukraine at this stage include: combining the tools inherent in both directions of policies, strengthening its flexibility and adaptability to socio-economic processes; sy­ner­gy of policy instruments in the context of ensuring debt sustainability and reducing fiscal risks; substantiation of the common strategic goals of policies, which will contribute to strengthening their coordination, in particular by developing an appropriate strategy; the development of a financial toolkit for prevention and response, within the framework of which policy instruments are used together, in particular by improving the traditional practice of applying macroprudential measures; streng­thening the independence of state institutions that ensure the formation and implementation of fiscal and monetary policy by continuing institutional and legislative reforms in the relevant areas.

The subject of this research is the complex interaction between fiscal and monetary policy within the framework of various monetary regulation regimes. The work focuses on analyzing systemic contradictions and channels of mutual influence between government budget decisions and central bank operations, which can either neutralize or amplify each other's effects, creating a threat to macroeconomic stability. The empirical analysis focuses on three historically established monetary regimes: targeting money supply (using the example of the USA from 1979 to 1982), targeting exchange rates (using the example of Argentina from 1991 to 2001), and targeting inflation (using the example of Chile in the 2000s). The study examines how each of these regimes creates unique constraints and opportunities for fiscal authorities, and how the procyclicality or countercyclicality of fiscal policy, influenced in part by the quality of tax revenue forecasting, affects the overall effectiveness of macroeconomic regulation. The methodological foundation of the work is based on comparative historical analysis and qualitative case studies. For an in-depth analysis, a process-tracing method was applied in each case. The scientific novelty of the research lies in substantiating the thesis that qualitative tax forecasting and planning are not merely technical functions, but determinants of macroeconomic coordination that mediate the interaction between fiscal and monetary policy. The analysis conducted led to the conclusion that the cause of conflicts between policies is not so much the inconsistency of short-term actions, but a fundamental institutional imbalance, wherein procyclical fiscal policy based on inaccurate revenue forecasts systematically undermines monetary efforts. The examples of the USA and Argentina show that even technically flawless monetary regimes become ineffective under conditions of fiscal dominance and budget procyclicality. The successful experience of Chile demonstrates that the creation of modern fiscal institutions, such as structural budget rules based on objective long-term forecasts, allows the transformation of an abstract coordination principle into a functioning mechanism. Thus, the key conclusion of the work is that the effectiveness of any monetary and credit policy regime is influenced by the ability of fiscal authorities to ensure predictability of budget revenues through effective tax planning.

Regime Switching Monetary and Fiscal Policy Rules and Interaction there-in: An Indian Case Study

Objective: The objective of the article is to determine whether the policy of the National Bank of Poland (NBP) as conducted in recent years may be the basis for bringing the president of the NBP before the State Tribunal for violating the Constitution of the Republic of Poland. Research Design & Methods: The independence of the central bank is of undoubted value in terms of controlling the price level (inflation), but the ban on supporting the government during periods of financial crisis, for example the COVID-19 pandemic crisis, cannot be inviolable. In the detailed analysis of the subject literature, the significance of the activities of other central banks, primarily the European Central Bank, in 2007, is included. An analysis of the NBP’s activities during the COVID-19 pandemic was carried out, with particular emphasis on inflation, independence from the government, communication with the public, and financing the government’s borrowing needs. Findings: Analysis of allegations regarding the NBP policy, including the validity of criticism (inflation). However, there are a number of counter-arguments against taking such drastic steps against the president of the National Bank of Poland, whose actions resulted in government support (redemption launched on the secondary market) during the COVID-19 pandemic period, for violating the Constitution. Implications/Recommendations: It is necessary to introduce a provision into the Constitution allowing the NBP to purchase treasury bonds on the secondary market during periods of extraordinary difficulties on financial markets. Consideration should be given to changing the method of appointing members of the Monetary Policy Council (MPC) in order to prevent a single political grouping exercising political power for more than one term. Contribution: The policies of many central banks in the world, including the ECB, the Fed, the Bank of England, and others, confirm the hypothesis that central banks cannot be (and are not) inactive during periods of crisis, in which the fiscal policy resources available to the government are insufficient. The paper draws particular attention to the need for a pragmatic approach in Poland in extreme/crisis conditions. It also points out the need for institutional coordination of fiscal and monetary policy at the Financial Stability Committee.

Fiscal policy concerned with the government’s choice regarding the optimal use of taxation and government spending to control and adjust the aggregate demand in the economy. Monetary policy refers to the central bank’s control regarding the availability of credit in the economy to achieve the objective of price stability and this control can be exerted through money supply and interest rate channel. The ultimate objective of the both policies is to maximise the overall welfare of the society which can be achieved by keeping the inflation rate low and employment at its potential level. There are number of channels in which fiscal policy can impinge on monetary policy. An expansionary fiscal policy leads to an expansionary monetary policy, which may in turn fuel inflation and appreciate the domestic currency and that cause deterioration in the balance of payments. On the other hand if government finances the deficit through the markets (in a non-monetary way) then the fear of crowding out of the private sector arise in the economy. On external side when a country is depending on foreign funding of domestic debt, this results in deterioration in the exchange rate and balance of payment. Another more direct channel of fiscal policy is the impact of indirect taxes on price level. Besides this, perceptions and expectations of the general public about the large and on going budget deficits and resultant borrowings requirements may prompt a lack of confidence in the economic prospects. At the same time when people realise that government is borrowing for its own good, they will conclude that this can lead to higher taxation levels in future and consequently they consume less and save more, that is so called Recardian equivalence.

Monetary and fiscal policy interactions in a frictional model of fiat money, nominal public debt and banking

Electronic money (e-money), as a network good, could become an important form of currency in the future. Such a development could affect monetary policy effectiveness. If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require changes in the central bank operational target and a closer coordination of monetary and fiscal policies. Also, the optimal size of monetary unions would be different. However, the current level of e-money use does not seem to pose a threat to the stability of the financial system. Thus, central banks can successfully implement the objectives of monetary policy.

The coordination of monetary and fiscal policies is a crucial condition for maintaining macroeconomic stability in modern economies. Historical experiences – such as the tight monetary policy in the United States during the 1980s, the global financial crisis of 2008, and the COVID19 pandemic – demonstrate that applying either policy in isolation cannot deliver sustainable results. Monetary policy primarily targets inflation through the regulation of money supply, interest rates, and credit conditions, while fiscal policy relies on government spending, taxation, and borrowing instruments to support economic balance. Their coordination is essential for controlling inflation, reducing unemployment, and ensuring sustainable debt management. Recent studies also confirm that during crises, coordinated monetary-fiscal actions protect social welfare, accelerate economic recovery, and strengthen sustainable development. Therefore, the interaction of these two policies plays a strategic role in ensuring resilience and long-term stability of national economies

This paper provides a case study to characterize the monetary policy regime in Malaysia, from a medium‐ and long‐term perspective. Specifically, we ask how the Central Bank of Malaysia, Bank Negara Malaysia (BNM), has structured its monetary policy regime, and how it has conducted monetary and exchange rate policy under the regime. By conducting three empirical analyses, we characterize the monetary and exchange rate policy regime in Malaysia by three intermediate solutions on three vectors: the degree of autonomy in monetary policy, the degree of variability of the exchange rate, and the degree of capital mobility.

Analysts have commonly argued that there has been a decline in international coordination of the kinds of policies that governments can use to manage the international payments imbalances that emerge when different governments pursue different macroeconomic policies. The decline typically has been attributed to a posited decline in American hegemony. In contrast, this article argues that international coordination of macroeconomic adjustment policies (trade and capital controls, exchange rate policies, balance-of-payments financing, and monetary and fiscal policies) was at least as extensive for much of the 1980s as it had been in the 1960s. There was, however, a shift away from coordination of balance-of-payments financing and other policies that have limited direct consequences for domestic economic and political conditions and a concurrent shift toward coordination of monetary and fiscal policies that are critically important for domestic politics and economics. This change is best explained as a consequence of changes in the structure of the international economy. Most important, international capital market integration encouraged governments to coordinate monetary and fiscal policies because balance-of-payments financing and exchange rate coordination alone are insufficient to manage the enormous payments imbalances that emerge when capital is able to flow internationally in search of higher interest rates and appreciating currencies.

Purpose This paper aims to estimate a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model for Egypt using Bayesian techniques and data for the period FY2004/2005:Q1-FY2015/2016:Q4 to assess monetary and fiscal policy interactions and their impact on economic stabilization. Outcomes of monetary and fiscal authority commitment to policy instruments, interest rate, government spending and taxes, are evaluated using Taylor-type and optimal simple rules. Design/methodology/approach The study extends the stylized micro-founded small open economy New Keynesian DSGE model, proposed by Lubik and Schorfheide (2007), by explicitly introducing fiscal policy behavior into the model (Fragetta and Kirsanova, 2010 and Çebi, 2011). The model is calibrated using quarterly data for Egypt on key macroeconomic variables during FY2004/2005:Q1-FY2015/2016:Q4; and Bayesian methods are used in estimation. Findings The results show that monetary and fiscal policy instruments in Egypt contribute to economic stability through their effects on inflation, output and debt stock. The monetary policy Taylor rule estimates reveal that the Central Bank of Egypt (CBE) attaches significant importance to anti-inflationary policy and (to a lesser extent) to output targeting but responds weakly to nominal exchange rate variations. CBE decisions are significantly influenced by interest rate smoothing. Egyptian fiscal policy has an important role in output and government debt stabilization. Additionally, the fiscal authority chooses pro-cyclical government spending and counter-cyclical tax policies for output stabilization. Again, past values of the fiscal instruments are influential in the evolution of the future fiscal policy-making process. Originality/value A few studies have examined the interaction between monetary and fiscal policy in Egypt within a unified framework. The presented paper integrates the monetary and fiscal policy analysis within a unified dynamic general equilibrium open economy rational expectations framework. Without such a framework, it would not be easy to jointly analyze monetary and fiscal transmission mechanisms for output, inflation and debt. Also, it would be neither possible to contrast the outcome of monetary and fiscal authorities commitment to a simple Taylor instrument rule vis-à-vis optimal policy outcomes nor to assess the behavior of monetary and fiscal agents in macroeconomic stability in context of an active/passive policy decisions framework.

The recession following the sub-prime crisis has rekindled international interest in the field of monetary and fiscal policy interaction. However, very little has been done to appropriately estimate these dynamic policies. This paper estimates regime- switching monetary and fiscal policy rules and lays strong emphasis on mis-specification testing. We apply a Markov regime-switching model to estimate monetary and fiscal policy rules for India to highlight the evolving stance of Indian macro-policy for the period 1951–2008 and investigate the behaviour of select macroeconomic variables under the estimated policy regimes. Our results suggest that, in India, fiscal policy was largely active for the entire period except for a few periods of restraint. Monetary policy, despite achieving greater autonomy post-1990s, has largely been accommodating fiscal policy. Whenever monetary policy became active, fiscal policy undermined monetary policy’s effectiveness by not accommodating accordingly. We argue for an aggressive monetary policy and a constrained fiscal policy in India.

Financial vulnerability, fiscal procyclicality and inflation targeting in developing commodity exporting economies

How Can it Work? On the Impact of Quantitavie Easing in the Eurozone

Independent or Coordinated? Monetary and Fiscal Policy in EMU