The interaction of the three policies: Wage, monetary and fiscal

I n OECD countries, it is important to understand the interaction between the three policies: wage, monetary and fiscal. It is because wage policy is restrictive that inflation is subdued, which allows monetary policy to be expansionary, leading to low interest rates, which enables fiscal policy to be expansionary. Those who call for a more expansionary wage policy (“left-wing Keynesian” economists) should understand that it would lead to a more restrictive monetary policy, leading also to a more restrictive fiscal policy. Those who call for an expansionary fiscal policy backed by an expansionary monetary policy (supporters of modern monetary theory) should understand that this is only possible if there is a restrictive wage policy. Last, it is important to understand that monetary policy and fiscal policy move in the same direction in response to wage policy.