Comments on “Fiscal and monetary policy interactions: Empirical evidence on optimal policy using a structural new-Keynesian model”

Abstract

1. The objectiveThe objective of this paper is the empirical assessment of strategic complementar-ity or substitutability of fiscal and monetary policy.I believe that the most relevant issue on the interaction between monetary and fis-cal policies is the amount of coordination among the authorities necessary for eachauthority to reach its own goals. In a recent paper Sims (2003) has stressed that aprerequisite for central bank to control inflation is appropriate coordination withor backup by fiscal policy and that the nature of the required coordination dependson whether and how central bank independence from fiscal authorities has beenimplemented. The importance of the coordination between monetary and fiscalauthorities to achieve inflation stabilization has been originally strongly emphasizedin by Sargent and Wallace (1981) who illustrated how an undisciplined fiscal policymay exert pressures on the monetary authority to sooner or later monetize the def-icit. A different stream of the literature, usually categorized as the fiscal theory of theprice level (FTPL), puts at the center stage the role of the (monetary and fiscal) QTRpolicy mix in determining the joint dynamics of inflation and output. According tothis view, the strong anti-inflationary policy pursued in the US with the onset ofthe Volcker–Greenspan regime would not have sufficed to successfully moderateinflation without the fiscal adjustment that characterized the US economic policythroughout the nineties. While the argument pursued in several contributions of