Munich Personal RePEc Archive

Monetary and fiscal policy should be merged, which in turn changes the role of central banks

Musgrave, Ralph S. (2011): Monetary and fiscal policy should be merged, which in turn changes the role of central banks.

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Abstract

Keeping monetary and fiscal policy separate causes economic distortions, thus the two should be merged. That is, in a recession for example, the government and central bank should simply spend more (and/or collect less tax), and fund the latter from new or “printed” money.

Merging monetary and fiscal policy necessitates a different relationship or split of responsibilities as between governments and central banks, but this is not a big problem. Plus the new relationship dispenses with an illogical element in the current typical relationship, namely that both central bank and government influence aggregate demand.

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