Interactions between Monetary and Fiscal Policy
Interactions between Monetary and Fiscal Policy in the Current Situation Vice Chairman Donald L. Kohn, At the Conference on Monetary-Fiscal Policy Interactions, Expectations, and Dynamics in the Current Economic Crisis, Princeton University, Princeton, New Jersey May 23, 2009 http://www.federalreserve.gov/newsevents/speech/kohn20090523a.htm Our current economic situation has altered some of the usual interactions between monetary and fiscal policy. One change regards the relative effects of monetary and fiscal policy. The depth and persistence of economic weakness has meant that traditional monetary policy–the target for the federal funds rate–has become constrained from easing as much as might be desirable under the circumstances, and, as a consequence, the target federal funds rate is anticipated to remain near zero for some time. But as a result, fiscal stimulus has potentially become more effective in boosting economic activity than it usually would be. Another change involves the potential for monetary policy actions to have greater fiscal implications than usual. The Federal Reserve has extended both its open market operations and lending programs in unprecedented ways to ease financial conditions and to help revive economic activity. In our open market operations, we have embarked on large-scale purchases of intermediate- and long-term Treasury securities, agency debt, and agency-guaranteed mortgage-backed securities (MBS) in order to put further downward pressure on borrowing costs, greatly increasing the degree of maturity transformation on our balance sheet. In addition, our traditional liquidity operations have been extended to include new borrowers and new markets, with the potential for greater credit risk than usual. In my view, our nontraditional policy actions have been necessary to avert a far worse economic outcome, and they remain consistent with the traditional goals and principles of monetary policy.
Go here to see the original:
Interactions between Monetary and Fiscal Policy