In macroeconomics, fiscal and monetary policies are both viewed as important macro policy tools for stabilizing aggregate demand, and their transmission channels and effects are considered to interact with each other. By adjusting interest rates, monetary policy can affect the extent to which the intertemporal substitution of aggregate demand occurs and thus alter the size of fiscal multipliers. These adjustments can also impact government debt accumulation through changes in interest payments. Conversely, fiscal policy and resulting government debt levels, just like other economic and social environments, can influence the transmission and impact of monetary policy by affecting the decision-making of households and firms. In addition, some theories posit that primary fiscal balance dynamics themselves impact the determination of the aggregate price level. Academic interest in the interaction of the two policies has intensified, sparked by debates on how stimulative policies should be executed in response to the global financial crisis and inflation surges after the COVID-19 pandemic. This paper overviews recent macroeconomic studies on monetary and fiscal policy interactions mainly from three perspectives: the Taylor rule and fiscal multipliers, interest rates and government debt, and the fiscal theory of the price level.
Keywords: Taylor rule; fiscal multipliers; interest rates and government debt; fiscal theory of the price level
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.