Monetary Policy and Government Finance

Abstract

A discussion of “New Approaches in Monetary Policy” — the focal theme of the 1977 SUERF-Colloquium — would obviously be incomplete, if the interaction of monetary and fiscal policies were not explicitly introduced as a topic for debate. The overt adoption of monetary targetry in larger industrial countries in the midst of an unprecedented postwar recession was motivated by the necessity to bring rampant inflation under control. However, nobody would have dared to predict, when these experiments started, whether the pursuit of cautiously established targets for the growth of the money supply by major central banks would turn out to be compatible also with the smooth financing of huge, cyclically inflated public sector borrowing requirements and the desired recovery from the 1974/75 worldwide slump. The evidence available to date is probably still too inconclusive to permit a final judgement on the merits or shortcomings of the new approaches. The weakening of the economic upswing in Europe and Japan since the middle of 1976 and apprehensions building up in 1977 that strict control of monetary growth by the Federal Reserve System could dampen economic activity in the United States prematurely are likely to keep the adopted “mixes” of fiscal and monetary management and the role of central banks’ money supply policies under vivid public discussion.

The present paper reflects the opinions of the author only and does not purport to represent those of the Organisation to which he belongs.