Economic Commentary: Are fiscal and monetary policy pulling in the same direction?
News, Economic Commentaries It is easier to stabilise the economic cycle and inflation if fiscal and monetary policy do not run counter to one another. An Economic Commentary analyses how the two policy areas have related to the inflation target, whether they have been pro- or counter-cyclical, and whether they have moved in the same direction in the period 2006-2025.
“Our analysis indicates that fiscal and monetary policy have largely pulled in the same direction; that is, both have either been expansionary or contractionary at any given time. “This should have smoothed out the economic fluctuations,” says Deputy Governor Anna Seim, one of the authors of the Economic Commentary.
One explanation for this is that there has been no conflict between the objectives of the different policy areas. During this period, inflation has mostly been below target, and resource utilisation weaker than normal. Economic policy has therefore been able to focus on stabilising both inflation and resource utilisation.
The analysis also shows that fiscal policy has generally been expansionary when economic activity has been low, but it does not find the same pattern for monetary policy. However, monetary policy has been expansionary when the forecasts have suggested that inflation would be below target. This implies that monetary policy has primarily responded to deviations from the inflation target.
Read more in the Economic Commentary, written by Alexander Czarnota, Marie Hesselman and Jyry Hokkanen, who work in the Monetary Policy Department, and Anna Seim, Deputy Governor of the Riksbank.