A back-of-the-envelope illustration of the “monetary offset”

Recently John Aziz took issue with a piece by Ramesh Ponnuru which was skeptical of the benefits of fiscal stimulus. Scott Sumner critiqued Aziz´s piece. That debate is likely to extend to ‘infinity’.

A new paper by Christy and David Romer will be presented on March 6 at a NBER Conference and will surely rekindle the debate (HT Doug Irwin). I take a ‘peek’, at their conclusion:

Another policy implication of our study involves the interaction of monetary and fiscal policy. The strong counteracting monetary policy response to permanent Social Security benefit increases likely explains why their effects were relatively short-lasting and did not spread to broader economic indicators. Similarly, the different monetary policy responses that we find to benefit changes and tax changes may be an important source of the stark differences we find in the effects of permanent benefit changes and tax changes. These results support the view that the effects of fiscal policy are very dependent on the conduct of monetary policy. And they suggest that if fiscal policymakers want to achieve some objective, coordination with monetary policymakers may be essential.

What I´ll do here is just a back-of-the-envelope illustration of the ‘connections’ between fiscal policy, monetary policy and real output growth.

Read the whole article here.