About this Bulletin
The COVID-19 period saw the large-scale use of fiscal and alternative monetary policy tools worldwide to offset the negative economic impacts of the global pandemic. This occurred as the monetary policy rates worldwide approached their lower bound of effectiveness. In some countries, these tools were being used for the first time, often with uncertain impacts. Such factors drew attention to the role that monetary and fiscal policy might play in supporting an economy during a large shock that pushes conventional monetary policy to its limits and the importance of effective policy coordination during such episodes.
This Bulletin reviews the recent international literature on monetary-fiscal coordination and outlines lessons for policymaking at the Reserve Bank of New Zealand.
Key findings
A range of emerging insights from the recent international literature on monetary and fiscal policy coordination following COVID-19 include that:
- Monetary policy continues to have a primary role in stabilising the economy, but fiscal policy may have a temporary role when conventional monetary policy is pushed to its limits. Previously well-canvassed constraints on fiscal policy for macroeconomic stabilisation continue to preclude its regular use for managing the business cycle.
- The appropriate mix of monetary and fiscal tools used at the lower bound of conventional monetary policy will depend on prevailing economic and financial conditions. Decision makers should be agile and adapt their strategies as conditions evolve. Decision makers should also have clear objectives and exit strategies for the policy tools used in exceptional circumstances. This helps ensure transparency and accountability for meeting their respective policy goals.
- The effectiveness of both monetary and fiscal policy at the ELB is underpinned by fiscal sustainability. Maintaining fiscal headroom limits the risk of monetary policy being overburdened, conflicted, or frustrated in achieving its price stability mandate by fiscal policy.
- Maintaining well-informed, independent decision-making between monetary and fiscal policy is paramount. Alternative monetary policy financing needs to maintain monetary policy credibility, flexibility and transparency alongside appropriate government balance sheet control. Timely and accurate economic, financial, and policy information is essential for well-informed decisions by both monetary and fiscal policy.