The Relative Importance of Fiscal and Monetary Policy: An Empirical Perspective

20 Pages Posted: 24 Jul 2020

See all articles by Megan Czasonis

Megan Czasonis

State Street Corporate

Mark Kritzman

Windham Capital Management

David Turkington

State Street Associates

Date Written: June 30, 2020

Abstract

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

Czasonis, Megan and Kritzman, Mark and Turkington, David, The Relative Importance of Fiscal and Monetary Policy: An Empirical Perspective (June 30, 2020). MIT Sloan Research Paper No. 6152-20, Available at SSRN: https://ssrn.com/abstract=3595562 or http://dx.doi.org/10.2139/ssrn.3595562

Megan Czasonis

State Street Corporate ( email )

1 Lincoln Street
Boston, MA 02111
United States

Mark Kritzman (Contact Author)

Windham Capital Management ( email )

800 Boylston Street
30th Floor
Boston, MA 02199
United States
6174193900 (Phone)
6172365034 (Fax)

David Turkington

State Street Associates ( email )

United States

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