Structural Reform and Market-Based Policies Heighten Need for Policy Coordination

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Page 176

IMF Survey: What is the rationale for monetary and fiscal policy coordination, and what is required to achieve it? Why has this become an important issue? de la Piedra: Close coordination between monetary and fiscal policy is essential for sustainable economic growth in a context of price stability and viable external accounts. Effective policy coordination makes it easier for policymakers to achieve their objectives efficiently, in part by ensuring their commitment to mutually agreed objectives. Without efficient policy coordination, financial instability could ensue, leading to high interest rates, pressures on exchange rates, rapid inflation, and an adverse impact on economic growth.

To be efficient, coordination must be based on sustainable and credible monetary and fiscal policies. Even if decision makers attempt to coordinate their policies, efforts will ultimately fail if one or both policies are unsustainable. The less credible one policy is, the larger will be the burden on the other policy. Coordination also needs to account for the different time frames in which monetary and fiscal policies operate. Whereas monetary policy can be adjusted on short notice, it usually takes longer to alter the fiscal stance. The joint determination of objectives and policies by the monetary and fiscal authorities is also required for efficient policy coordination. If policy consistency comes about simply by the passive reaction in one policy area to the commanding position of the other area, the intended policy effects will not be achieved.

There is always a need for policy coordination, irrespective of an economy's stage of development. However, with the increased emphasis in many countries on structural reform and market-based policies, it has become more important to ensure that actions in one policy area do not undermine those in a different area, but rather that they support each other.

IMF Survey: What is the main impact of monetary policy on public debt management and of public debt management on monetary policy?

DE LA PIEDRA: Monetary policy affects public debt management through several channels. It can, for example, improve or hinder the government's ability to place debt at reasonable cost. An expansionary monetary policy may initially permit placement of public debt at low interest rates; however, inflationary pressures will likely ensue, interest rates will tend to increase, and available financing will fall unless real...