2 Issues in the Coordination of Monetary and Fiscal Policy

Now, as often in the past, there are complaints from all quarters about the lack of coordination between monetary and fiscal policy. Indeed, the feeling that monetary and fiscal policies are acting at cross purposes is quite prevalent. This attitude, I think, reflects dissatisfaction with the current mix of expansionary fiscal policy and contractionary monetary policy, which pushes aggregate demand sideways while keeping interest rates sky high. This, too, has frequently been so in the past. Figure 1 offers a rough impression of the recent history of monetaryfiscal coordination. It plots the change in the high-employment surplus (as a crude indicator of the thrust of fiscal policy) on the horizontal axis and the change in the growth rate of Mi (as a crude indicator of monetary policy) on the vertical axis for the years 1961-1980. The scatter of points does not leave the impression of a strong negative correlation, as might be expected from well-coordinated policies. But even by these lax standards, the projected points for the early 1980s (falling money growth rates with widening high-employment deficits) will-if realized-be exceptional. The clear implication of the current debate is that greater coordination between the fiscal and monetary authorities would be better. There