Fiscal Policy Sovereignty and Monetary Policy Coordination Full fiscal policy sovereignty requires that fiscal policy intervention is unbounded from revenue generation/ability to pay and operated free of adverse effects (fiscal drag) upon 1) disposable income, 2) financial constraint, 3) financial cost, 4) credit variation, 5) fiscal space and 6) net wealth equity. Full monetary policy coordination, with or without independence regime, requires a perfectly elastic intervention operations that reduce and minimize any adverse effects of bounded fiscal policy upon the divergence gap between actual rates of 1) inflation, 2) interest risks of liquidity and credit, 3) net wealth equity, 4) foreign currency exchange and their corresponding target policy rates. Fiscal policy with a limited degree of sovereignty or bounded sovereignty is positively related with spending and financial pressures that could lead into higher rates of inflation, interest liquidity and credit risk, foreign currency exchange and higher levels of direct fiscal drag upon disposable income spending from present value expectations of forward tax obligations (Recardian Equivalence), credit/resource rationing (crowding out) and net wealth equity burden from state debt accumulation. Monetary policy coordination with a bounded fiscal policy regime utilizes accommodation measures that attempt to stabilize 1) actual rates of inflation and liquidity risk premia with policy target interest rate variation, 2) credit risk premia with quantitative easing (QE) measures, 3) foreign exchange rates with sterilization measures and 4) net wealth equity burden formation with issuing appropriate monetary base liquidity as currency and reserves (net financial assets) and thus counterbalance the adverse effects of non- sovereign (bounded) fiscal policy. Then, the following proposition follows. Bounded fiscal policy adverse effects, if any realized, can be neutralized if and only if monetary policy coordination is practiced regardless of the degree of independence regime that monetary policy is regulated to operate.
Posted on: Fri, 02 May 2014 20:11:11 +0000
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