Globalisation of the Interaction between Fiscal and Monetary Policy
16 Pages Posted: 13 Apr 2013
The interaction between fiscal and monetary policies evolves over time and differs from country to country. In this study, we first present the case of Turkey. During the 1990s, the country’s fiscal deficits and public debt ballooned. Monetary policy was severely constrained by the resulting high-risk outlook for the economy, combined with the underdevelopment of domestic financial markets. In the 2000s, however, a significant fiscal consolidation has allowed fiscal policymakers to move from a procyclical to a countercyclical stance, increasing the effectiveness of monetary policy. In the second part of the paper, we discuss the implications of globalisation for the interaction between fiscal and monetary policy. One possible channel comes from the interplay of the inflation rates, policy rates and real exchange rates between emerging and advanced countries. Structural factors such as differences in consumer baskets and quality measurement error, or convergence processes might lead to higher inflation rates and currency appreciation in emerging countries. It might be desirable to smooth this appreciation and contain excessive exchange rate volatility. In this regard, monetary policy in emerging countries might be constrained by inflation differentials and the low level of policy rates in developed countries. In this case, a possible policy option would be to use fiscal consolidation, a strategy that has been observed in emerging countries over the past decade.
Keywords: Fiscal policy, monetary policy, globalisation, real exchange rates
JEL Classification: E52, E62, F42, F31
Suggested Citation: Suggested Citation