Monetary and Fiscal Policy Coordination in an Age of Persistent Inflation, Rising Public Debt, and Global Economic Uncertainty

Abstract

The recent resurgence of inflation combined with unprecedented amounts of government debt and the increased economic uncertainty in the world has rekindled the discussion regarding the need and success of coordinating monetary-fiscal policies. This paper analyses the reflective play of both monetary and fiscal policy measures in the United States between 2000Q1 and 2024Q4 using a multifaceted econometric model that combines Autoregressive Distributed Lag (ARDL) bounds test, error correction modeling (ECM), and Structural Vector Autoregression (SVAR) models. This study examines long-run equilibrium relations and short-run dynamic adjustments of the policy variables by using quarterly data on the variables in terms of inflation, policy interest rates, money supply, government spending, fiscal deficit, government debt, GDP growth, and the Global Economic Policy Uncertainty Index. The output of this sutdy’s ARDL model shows that there is a strong long-term cointegration of policy tools, and the error correction term shows that it implies that it has an adjustment speed of about 42 percent per quarter to the equilibrium. The SVAR analysis shows that fiscal shocks have more long-lasting effects on inflation than monetary shocks in times of great uncertainty and there is less effectiveness in monetary policy reactions in times when the debt of the country reaches critical levels. The functions of impulse response reactions reveal that coordinated policy responses lower the volatility of inflation by 35 percent in comparison to uncoordinated actions. Analysis of variance decomposition indicates that fiscal policy shocks can account for 28 percent of inflation fluctuations at longer run which is significantly greater than before recorded. These results indicate that the conventional monetary dominance paradigm needs to be re-adjusted in modern high-debt, high-uncertainty settings, with consequences of independence of central banks and fiscal sustainability.