The Relative Importance of Fiscal and Monetary Policy: An Empirical Perspective
20 Pages Posted: 24 Jul 2020
Date Written: June 30, 2020
The authors introduce a new methodology for determining the relative importance of fiscal and monetary policy to promote growth and stabilize inflation. They apply this methodology to a panel of data that spans 66 years and 17 countries. Their analysis shows that, on average, monetary policy is more effective than fiscal policy at promoting recovery following episodes of low growth and that they are about equally effective in sustaining growth when growth is high. They also find that fiscal policy and monetary policy are about equally effective in curbing inflation when it is high, but that monetary policy is more effective at sustaining low inflation when it is low.
Keywords: Fiscal policy, Mahalanobis distance, Monetary policy, Statistical similarity
JEL Classification: C10, C60, E52, E62
Suggested Citation: Suggested Citation