Committee for a Responsible Federal Budget

Fiscal Policy, Monetary Policy, or Something in Between?

Jun 4, 2010

Yesterday, Donald Marron asked the question: "How Blurry is the Line between Monetary and Fiscal Policy?" As our readers know, we have been tracking the actions of the Federal Reserve, as well as those from the rest of the government, at Stimulus.org. The Federal Reserve, since the crisis, has engaged in a number of extraordinary actions (as we explain in our paper, The Extraordinary Actions Taken by the Federal Reserve). As Marron writes:

That clean distinction [between monetary policy and fiscal policy] was one of many casualties of the financial crisis... [Fed] actions differed from conventional monetary policy in two ways. First, they exposed the Fed to more financial risk... Second, in several cases the Fed offered to purchase financial assets at above-market prices or, equivalently, to make loans at below-market interest rates. In effect, the Fed chose to subsidize some specific financial activities.

Both changes increased the Fed’s fiscal importance."

... As Chairman Ben Bernanke argued in a speech last week, maintaining the Fed’s independence in monetary policy would be easier if policymakers would “further clarify the dividing line between monetary and fiscal responsibilities.” Let’s hope such guidance comes along before the next financial crisis strikes.

Read the post here.