Monetary and fiscal stimulus make a potent, if uneasy, combination

THE Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole, Wyoming, is the big event of the year for central bankers. But defining monetary policy is far harder than it used to be. In recent years central bankers have lurched ever closer to the realm of fiscal policy, mainly by buying government debt with freshly printed money. They can justify such “quantitative easing” (QE) on monetary grounds since they have already lowered short-term interest rates to, or close to, zero. But they also worry it is a slippery slope from QE to monetising government deficits and thence, inevitably, to inflation. When Phillip Swagel, then an official with the US Treasury, was asked why he attended the conference in 2008, he shrugged: “Fiscal policy, monetary policy—what’s the difference?”

For central bankers this is an unsettling thought. Their mistrust of fiscal policy was nicely captured in a paper presented at this year’s Jackson Hole conference by Eric Leeper of Indiana University*. As central bankers have become more independent, they have increasingly based their policies on rigorous economic analysis. By contrast fiscal policy is deeply politicised, with haphazard methods and few, if any, defined goals. …

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