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Don't Mix Monetary and Fiscal Policy: Why Return to an Old, Flawed Framework?
By Mickey D. Levy
Introduction
In recent decades, significant strides have been made in the conduct of monetary policy, as the Federal Reserve has successfully pursued the objective of stable, low inflation as a foundation for sustained economic expansion. During the same period, the objectivesof fiscal policy have evolved toward deficit reduction, while activist, short-run stabilization initiatives have been suppressed. The Fed'scredible, low-inflation monetary policy and the reduction of the government'spurchas esasa share of national output and the freeing of those resources for private uses have contributed significantly to robust economic and financial performance. But the resulting budget surpluses now elicit significant new spending initiatives. As politicians debate how to "spend the surpluses," renewed calls that monetary policy will need to be adjusted to fiscal policy changes represent a replay of a monetary/fiscal policy mix framework that has led to macroeconomic policy mistakes in the past and, if pursued, could again unhinge the foundations for sustained healthy economic expansion.
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