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Policy Games: Coordination and Independence in Monetary and Fiscal Policies


No ONE WOULD dream of designing the human anatomy by disconnecting
the controls of the left and right sides of the body. Yet, for the
most important economic controls in a modern economy, monetary and
fiscal policies, economists today generally endorse the separation of
powers as a way of optimizing noninflationary growth. What are the
costs and benefits of coordination and independence in macroeconomic
policy? What are the consequences of the independence in policymaking
that has become firmly rooted in the American polity? Does policy
independence lead to a bias in the mix of monetary and fiscal policies?
These are the questions addressed in this study.
One of the major implications of separated powers is seen in the mix
of monetary and fiscal policies that is found in major countries today.
Policymakers and economists in virtually all countries with separated
monetary and fiscal policies believe that their countries suffer from fiscal
deficits and real interest rates that are too high to promote a healthy level
of private investment and adequate long-term growth of potential output.
This syndrome of an unfavorable and undesirable monetary-fiscal
mix has been a feature of the macroeconomic landscape for more than a


Stanley Fischer

Vice Chairman of the Board of Governors of the Federal Reserve System

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