The debate on the relative effectiveness of monetary and fiscal policies for cyclical management

The current organisation between monetary and fiscal policy in OECD countries to ensure cyclical stabilisation is ineffective for several reasons: Fiscal policy is structurally expansionary, as governments have a strong need for public spending and on average want to cut taxes; It is then difficult to switch to a countercyclical monetary policy, due to the risk of a debt crisis and fiscal contraction when interest rates have to be raised, which is clear to see today. We can then think about a different organisation where: Monetary policy has long-term objectives (price stability, financial stability) and has no countercyclical action; it is never permanently very expansionary because of these long-term objectives; Countercyclical action is carried out through fiscal policy, rather than through the use of taxes (because of the necessary public spending). On average, public debt sustainability must be ensured by fiscal policy, since monetary policy cannot be permanently expansionary. It would therefore be necessary to move from an organisation where fiscal policy is chronically expansionary , which also requires monetary policy to be expansionary, to an organisation where monetary policy has long-term stability objectives and where fiscal policy is countercyclical and more structurally expansionary.