Analysis of the basic content of monetary policy and fiscal policy coordination
Understanding of the Concept of “Coordination and Cooperation” The coordination and cooperation between monetary policy and fiscal policy actually contains two meanings: one is coordination, which mainly refers to the following situations :(1) the exchange of information between the two policy makers;(2) Mutual recognition of each other’s existence and behavior;(3) Taking certain decisions together;(4) Reach agreement in a series of actions.The second IS coordination, that IS, collocation and combination, which refers to a basic idea of macro-control, that IS, macro-control authorities flexibly use a variety of policy tools at the same time to control the operation of the macro-economy, in order to achieve a certain goal, such as IS-LM model, “elastic collocation”, etc..This is because in the actual macro-control, it is very difficult to rely on a single policy means to control the operation of the macro-economy. Macro-control authorities always use a variety of policy tools to control the economy comprehensively, especially in the case of conflicting policy objectives, the significance of policy collocation is greater.The BIS summarizes several cases of monetary and fiscal policy coordination.First, in recessions, monetary policy should act to fill the output gap when fiscal policy is insufficiently expansionary, assuming constant inflation.When fiscal policy is focused on medium-term objectives or constrained by rules, central banks should give greater weight to output stability in their response equations.Second, when uncertainty about a particular policy impact is high, fiscal and monetary policies must act in concert. Coordination is crucial to maximize policy effects.For example, in 2001, when the world economy was Mired in continued weakness, the uncertainty of policy effects was high, and interest rates had already fallen to a very low level, the need for policy coordination became very obvious to many developed and developing countries.Many studies have pointed out that in such circumstances, the right strategy is to use as many policy tools as possible to enhance policy effectiveness, while incremental action increases the risk that policy will be ineffective and the economy will continue to decline.Finally, when the exchange rate is sensitive to fiscal policy, policy dilemmas may become more prominent, and policy coordination becomes more important.In theory, with free capital flows, floating exchange rates and a constant risk premium, fiscal expansion would raise domestic interest rates, leading to currency appreciation.Conversely, when capital flows are low, fiscal expansion spills over into imports, widening the current account deficit and weakening the currency.In practice, however, a country’s risk premium can be very sensitive to fiscal policy, with the implication that a rise in fiscal deficits may actually increase the likelihood of default, putting pressure on the currency.In recent years, the experience of emerging market countries shows that fiscal expansion in an environment of low fiscal credibility and high external debt exposure can make exchange rate expectations more unstable.On the other hand, if fiscal consolidation can have a real impact on public confidence, risk premiums will fall and the exchange rate will rise.As two major macroeconomic policies based on the consistency of goals, monetary policy and fiscal policy can achieve better policy effects if they can be effectively coordinated and cooperated in actual operation.At the same time, monetary and fiscal policies will also interact and influence each other.If there is no coordination and cooperation between the two, it will inevitably restrict and restrict each other.In general, the coordination between monetary policy and fiscal policy covers a wide range of fields, both at the macro level and in concrete operation.To sum up, we need to focus on the following aspects: First, we need to promote basic balance in aggregate economic output and achieve steady macroeconomic growth.Fundamentally speaking, both monetary policy and fiscal policy belong to aggregate demand management policy. Therefore, to promote the balance of economic aggregate and achieve stable growth is the most basic goal and content of their coordination and cooperation.As we know, the specific performance of economic aggregate balance is high growth, low inflation and full employment.Although in terms of the ultimate goal, the two are the same.Promote economic restructuring and raise the potential output level of the economic system.Fiscal policy is arguably more obvious here.Fiscal policy can not only directly participate in economic restructuring through direct investment, such as infrastructure construction, but also guide the flow of capital through policy support, such as tax reduction and exemption, so as to promote economic restructuring.The main tool of monetary policy in this respect is credit policy. Financial institutions can promote the adjustment and improvement of industrial structure, income distribution structure and regional economic structure by increasing the credit support to high-tech industry, economic weak links and vulnerable groups.Nonetheless, fiscal policy needs to work in tandem with monetary policy to address structural problems in the economy.For example, in improving the aggregate demand structure, fiscal policy should accelerate the transformation and construction of its public finance function and increase the expenditure of public goods. Meanwhile, monetary policy should also further improve the consumer financing environment.In terms of improving the structure of national income distribution, the fiscal authorities should carry out reforms such as individual tax system, while the monetary policy should also strive to maintain the price level at a reasonable level.In promoting the adjustment of industrial structure, financial departments take measures to support the development of some industries, which also needs to establish credit policies to promote the development of relevant industries.In promoting the coordinated development of regions and urban and rural areas, while making comprehensive use of various fiscal measures, the relevant financial system should be timely improved to reduce financial risks, and credit support should be timely increased to provide good financial support and financing environment.Third, we should adapt to the trend of financial globalization and speed up the transformation of economic system and opening-up.The coordination between monetary policy and fiscal policy has more special significance and urgency under the condition of transition economy.For example, for emerging market countries, reforming fiscal policies to prevent excessive fiscal deficits is a key part of preventing financial crises.For another example, in order to maintain financial stability and promote the reform of the financial industry, the rescue of troubled financial institutions and the disposal of non-performing assets and the acceleration of the reform of state-owned commercial banks are all required for proper coordination and cooperation between the central bank and the financial authorities.Moreover, in an open economy, macroeconomic policy choices face more external constraints, and the coordination and cooperation of the two major policies also have more new content.For example, under the condition of floating exchange rate, monetary policy has more effect on the real economy than fiscal policy. With the gradual floating of RMB exchange rate, monetary policy is constrained by the system, resulting in the dilemma of internal and external balance.In this case, fiscal measures such as the issuance of special national bonds by the Ministry of Finance to achieve the reform of foreign exchange reserve management are conducive to strengthening the independence of monetary policy and a new area of coordination between the two policy systems.Fourth, strengthen coordination and cooperation in some key areas and “joint points”.In the specific operation, monetary policy and fiscal policy also need to coordinate a lot of places, among which national debt management and Treasury cash management are the most representative.National debt has dual functions of finance and finance. As the core financial market, national debt market plays an irreplaceable role in providing market liquidity.National debt is the combination of fiscal policy and monetary policy. The effective implementation of national debt policy needs the coordination and cooperation of monetary policy.For example, in the process of issuing national bonds, if the intensity of the central bank’s tightening monetary policy increases rapidly in a short period of time, it will strongly impact the bond market and cause the cost of issuing national bonds to rise.Besides national debt management, Treasury cash management is another important point of coordination between monetary policy and fiscal policy.This is because the central Banks of the modern market economy countries most open the Treasury single account, and the monetary policy operation and combining the state Treasury cash management and use of the Treasury funds to carry on the open market operations, both conducive to the central bank regulation of money supply in the whole society at the same time to meet the needs of government spending, and can reduce holding a net into the state Treasury funds balanceBen.In this process, the communication and coordination between the central bank and the financial authorities is crucial.Fifth, coordination and cooperation in other areas.Coordination between monetary policy and fiscal policy is also reflected in many other areas, such as the provision of quasi-public goods and international macroeconomic policy coordination.The former mainly refers to the coordination and cooperation in various projects with both social and private benefits, such as the reform of policy-based financial institutions, financial investment and financing.The latter extended the scope of coordination between monetary and fiscal policies to the world economy.After the euro was officially launched in 1999, the European Central Bank formally assumed the function of formulating the European unified monetary policy, but at the same time, the fiscal policy was still decided by each member state. Thus, how to coordinate the unified monetary authority and decentralized fiscal authority has become another research hotspot in the international economics circle in recent years.Conclusion Among the above contents, promoting economic aggregate balance and economic structure optimization are the two basic aspects of coordination and cooperation between monetary policy and fiscal policy.Overall, fiscal policy and monetary policy have their respective advantages, under the condition of market economy, the state-owned necessary according to the dynamic changes of the economy to realize the optimal combination of the fiscal policy and monetary policy, in a timely manner to establish and perfect the institutional framework of coordination between them, and give full play to the two policy system in the aggregate balance and structure optimization of the resultant force.