Interaction between Monetary and Fiscal Policy and the Policy Mix, Theoretical Consideration and Japanese Experience (The Effectiveness of Stabilization Policies: published in “The Bank of Korea International Conference 2005, Seoul: Bank of Korea”, 2005, pp. 149-183.)

Abstract

Interactions between monetary and fiscal policy depend on the specification of policy variables that fiscal policy uses. However, a general rule is that when monetary policy is capable of dealing with sticky price adjustment, a primary concern of fiscal authority should be to remedy the resource allocation. My regression study using cross-country data shows that in a majority of OECD countries fiscal policy relies on the automatic stabilizer. Japan is a unique case in that it relies heavily on discretionary fiscal policy. However, Japanese policymakers have recently changed their thinking regarding fiscal policy.