The Interaction Between Monetary and Fiscal Policy

Our chapter reviews positive and normative issues in the interaction between monetary and fiscal policy, with an emphasis on how views on policy coordination have changed over the last 25 five years. On the positive side, noncooperative games between a government and its central bank have given way to an examination of the requirements on monetary and fiscal policy to provide a stable nominal anchor. On the normative side, cooperative solutions have given way to Ramsey allocations. The central theme throughout is on the optimal degree of price stability and on the coordination of monetary and fiscal policy that is necessary to achieve it.