The relationships between fiscal and monetary policies
It is traditionally thought that fiscal and monetary policies are substitutable: a more expansionary fiscal policy relieves the need for an overly expansionary monetary policy (as central banks have often repeated), while a more expansionary monetary policy relieves the need for an overly expansionary fiscal policy. But there is strong reason to believe that fiscal and monetary policies are actually complementary: If fiscal policy is highly expansionary, the central bank is forced to conduct an expansionary monetary policy to prevent a loss of fiscal solvency (there is fiscal dominance); If monetary policy is expansionary, the government is encouraged to take advantage of it and conduct a more expansionary fiscal policy. Statistical analysis is ambiguous: Both f iscal and monetary policies have become more expansionary over time; But a cross-country comparison shows that the countries where fiscal policy is more expansionary are those where monetary policy is more restrictive (and vice versa).