Linking policy targets in navigating through fiscal-monetary crosswinds

Serhii Shvets; Serhii Shvets

doi:10.3934/NAR.2025025

National Accounting Review

2025, Volume 7, Issue 4: 602-629. doi: 10.3934/NAR.2025025

Previous Article Next Article

Research article

Linking policy targets in navigating through fiscal-monetary crosswinds

Serhii Shvets ^,

Department of Modeling and Forecasting of Economic Development, State Organization "Institute for Economics and Forecasting of the National Academy of Sciences of Ukraine", 26, Panasa Myrnoho, Kyiv, 01011, Ukraine

Received: 24 July 2025 Revised: 22 September 2025 Accepted: 24 October 2025 Published: 09 December 2025
JEL Codes: C68, E63, G18, H63, O23

The acceleration of debt dynamics resulting from increasing crises is a key issue in today's economic landscape. In this study, we proposed a solution by examining the relationship between money supply and public debt, adjusted for crisis distress. Applying this relationship to the intertemporal budget constraint of a consolidated government agent revealed the direct link between the public debt threshold and the inflation target. Building on this idea, we submitted a revised version of fiscal and monetary sustainability rules by linking their policy targets. The job was performed by introducing a joint component to monitor the gap between the money and public debt deviations from their equilibrium values. The given revision of the policy rules related to a strand of research in which the bond-to-money ratio was used as an effective joint nominal anchor to ensure fiscal and monetary solvency. Quantitative results demonstrated that such a revision could help counter abnormal financial volatility and shorten the time lag needed to restore debt sustainability and price stability under economic turbulence. In particular, the results outlined the initial conditions necessary to get on a promising growth path when the crisis hits. These conditions require balancing the short-term impact of the adjusted key policy rate and the long-term impact of public investment as a percentage of total public spending. An important implication of the study is that sharing responsibility by coordinating fiscal and monetary policy targets makes it less stressful for the economy under economic uncertainty. With this setup, fiscal mobility proves to be nearly twice as beneficial as monetary mobility when a fiscal dominance regime is appointed. Given these policy conditions, fiscal policy should be more responsive to the comparative volatility of the money supply and public debt to maximize the fiscal multiplier and welfare gains.
- fiscal-monetary interaction,
- fiscal policy target,
- monetary policy target,
- public debt,
- anti-crisis regulation,
- fiscal multiplier,
- welfare analysis,
- DSGE modeling
Citation: Serhii Shvets. Linking policy targets in navigating through fiscal-monetary crosswinds[J]. National Accounting Review, 2025, 7(4): 602-629. doi: 10.3934/NAR.2025025

Related Papers:

Abstract

The acceleration of debt dynamics resulting from increasing crises is a key issue in today's economic landscape. In this study, we proposed a solution by examining the relationship between money supply and public debt, adjusted for crisis distress. Applying this relationship to the intertemporal budget constraint of a consolidated government agent revealed the direct link between the public debt threshold and the inflation target. Building on this idea, we submitted a revised version of fiscal and monetary sustainability rules by linking their policy targets. The job was performed by introducing a joint component to monitor the gap between the money and public debt deviations from their equilibrium values. The given revision of the policy rules related to a strand of research in which the bond-to-money ratio was used as an effective joint nominal anchor to ensure fiscal and monetary solvency. Quantitative results demonstrated that such a revision could help counter abnormal financial volatility and shorten the time lag needed to restore debt sustainability and price stability under economic turbulence. In particular, the results outlined the initial conditions necessary to get on a promising growth path when the crisis hits. These conditions require balancing the short-term impact of the adjusted key policy rate and the long-term impact of public investment as a percentage of total public spending. An important implication of the study is that sharing responsibility by coordinating fiscal and monetary policy targets makes it less stressful for the economy under economic uncertainty. With this setup, fiscal mobility proves to be nearly twice as beneficial as monetary mobility when a fiscal dominance regime is appointed. Given these policy conditions, fiscal policy should be more responsive to the comparative volatility of the money supply and public debt to maximize the fiscal multiplier and welfare gains.

References

[1]	Afonso A, Gomes-Pereira F (2024) Does monetary policy influence euro area fiscal sustainability? Available from: https://www.ifo.de/DocDL/cesifo1_wp11266.pdf.
[2]	Afonso A, Sousa A (2024) Monetary and fiscal interplay: Does it work both ways? Econ Syst 48: 101188. https://doi.org/10.1016/j.ecosys.2024.101188 doi: 10.1016/j.ecosys.2024.101188
[3]	Ascari G, Florio A, Gobbi A (2023) Price level targeting under fiscal dominance. J Int Money Financ 137: 102876. https://doi.org/10.1016/j.jimonfin.2023.102876 doi: 10.1016/j.jimonfin.2023.102876
[4]	Bartsch E, Boivin J, Fischer S, et al. (2019) Dealing with the next downturn: from unconventional monetary policy to unprecedented policy coordination. Available from: https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/global-macro-outlook/august-2019.
[5]	Bernanke B, Blanchard O (2025) What caused the US pandemic-era inflation? Am Econ J Macroecon 17: 1–35. https://doi.org/10.1257/mac.20230195 doi: 10.1257/mac.20230195
[6]	Bianchi F, Faccini R, Melosi L (2022) Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength, NBER Working Papers 27112, National Bureau of Economic Research, Inc.
[7]	Bianchi F, Faccini R, Melosi L (2023) A Fiscal theory of persistent inflation. Q J Econ 138: 2127–2179. https://doi.org/10.1093/qje/qjad027 doi: 10.1093/qje/qjad027
[8]	Bianchi F, Melosi L (2019) The dire effects of the lack of monetary and fiscal coordination. J Monetary Econ 104: 1–22. https://doi.org/10.1016/j.jmoneco.2018.09.001 doi: 10.1016/j.jmoneco.2018.09.001
[9]	Bischi GI, Giombini G, Travaglini G (2022) Monetary and fiscal policy in a nonlinear model of public debt. Econ Anal Policy 76: 397–409. https://doi.org/10.1016/j.eap.2022.08.020 doi: 10.1016/j.eap.2022.08.020
[10]	Blanchard O (2019) Public debt and low interest rates. Am Econ Rev 109: 1197–1229. https://doi.org/10.1257/aer.109.4.1197 doi: 10.1257/aer.109.4.1197
[11]	Bolhuis M, Koosakul J, Shenai N (2024) Fiscal R-star: Fiscal-monetary tensions and implications for policy. IMF Working Paper WP/24/174. https://doi.org/10.5089/9798400282126.001 doi: 10.5089/9798400282126.001
[12]	Bublyk Y, Korablin S, Shapoval Y (2023) On the effectiveness of the interest rate channel within inflation targeting in Ukraine: A VAR approach. Banks Bank Syst 18: 293–306. http://dx.doi.org/10.21511/bbs.18(4).2023.24 doi: 10.21511/bbs.18(4).2023.24
[13]	Burgert M, Schmidt S (2014) Dealing with a liquidity trap when government debt matters: Optimal time-consistent monetary and fiscal policy. J Econ Dyn Control 47: 282–299. https://doi.org/10.1016/j.jedc.2014.08.018 doi: 10.1016/j.jedc.2014.08.018
[14]	Caramp N, Silva DH (2023) Fiscal policy and the monetary transmission mechanism. Rev Econ Dyn 51: 716–746. https://doi.org/10.1016/j.red.2023.08.001 doi: 10.1016/j.red.2023.08.001
[15]	Cevik EI, Dibooglu S, Kutan AM (2014) Monetary and fiscal policy interactions: Evidence from emerging European economies. J Comp Econ 42: 1079–1091. https://doi.org/10.1016/j.jce.2014.05.001 doi: 10.1016/j.jce.2014.05.001
[16]	Chen X, Leeper EM, Leith C (2022) Strategic interactions in U.S. monetary and fiscal policies. Quant Econ 13: 593–628. https://doi.org/10.3982/QE1678 doi: 10.3982/QE1678
[17]	Cochrane JH (2022) A fiscal theory of monetary policy with partially-repaid long-term debt. Rev Econ Dyn 45: 1–21. https://doi.org/10.1016/j.red.2021.06.001 doi: 10.1016/j.red.2021.06.001
[18]	Davig T, Leeper EM (2011) Monetary–fiscal policy interactions and fiscal stimulus. Eur Econ Rev 55: 211–227. https://doi.org/10.1016/j.euroecorev.2010.04.004 doi: 10.1016/j.euroecorev.2010.04.004
[19]	Galí J, López-Salido D, Vallés J (2007) Understanding the effects of government spending on consumption. J Eur Econ Assoc 5: 227–270. https://doi.org/10.1162/JEEA.2007.5.1.227 doi: 10.1162/JEEA.2007.5.1.227
[20]	Gokan Y, Turnovsky SJ (2025) Government spending, debt management, and wealth and income inequality in a growing monetary economy. J Money Credit Bank 57: 185–221. https://doi.org/10.1111/jmcb.13049 doi: 10.1111/jmcb.13049
[21]	Hinterlang N, Hollmayr J (2022) Classification of monetary and fiscal dominance regimes using machine learning techniques. J Macroecon 74: 103469. https://doi.org/10.1016/j.jmacro.2022.103469 doi: 10.1016/j.jmacro.2022.103469
[22]	Hodula M, Melecký A (2020) Debt management when monetary and fiscal policies clash: some empirical evidence. J Appl Econ 23: 253–280. https://doi.org/10.1080/15140326.2020.1750120 doi: 10.1080/15140326.2020.1750120
[23]	Honda J, Tapsoba R, Issifou I (2022) When do we repair the roof? Insights from responses to fiscal crisis early warning signals. Int Econ 172: 349–367. https://doi.org/10.1016/j.inteco.2022.02.008 doi: 10.1016/j.inteco.2022.02.008
[24]	Iskrev N (2010). Local identification in DSGE models. J Monetary Econ 57: 189–202. https://doi.org/10.1016/j.jmoneco.2009.12.007 doi: 10.1016/j.jmoneco.2009.12.007
[25]	Iwata Y, IIboshi H (2023) The nexus between public debt and the government spending multiplier: fiscal adjustments matter. Oxf Bull Econ Stat* 85: 830–858. https://doi.org/10.1111/obes.12547 doi: 10.1111/obes.12547
[26]	Jin H, Wang J (2024) The effects of a money-financed fiscal stimulus under fiscal stress. J Macroecon 81: 103621. https://doi.org/10.1016/j.jmacro.2024.103621 doi: 10.1016/j.jmacro.2024.103621
[27]	Kloosterman R, Bonam D, Van der Veer K (2024) The effects of monetary policy across fiscal regimes. J Macroecon 81: 103616. https://doi.org/10.1016/j.jmacro.2024.103616 doi: 10.1016/j.jmacro.2024.103616
[28]	Kumhof M, Nunes R, Yakadina I (2010) Simple monetary rules under fiscal dominance. J Money Credit Bank 42: 63–92. https://doi.org/10.1111/j.1538-4616.2009.00278.x doi: 10.1111/j.1538-4616.2009.00278.x
[29]	Leeper E (1991) Equilibria under 'active' and 'passive' monetary and fiscal policies. J Monetary Econ 27: 129–147. https://doi.org/10.1016/0304-3932(91)90007-B doi: 10.1016/0304-3932(91)90007-B
[30]	Ma Y, Lv L (2022) Money, debt, and the effects of fiscal stimulus. Econ Anal Policy 73: 152–178. https://doi.org/10.1016/j.eap.2021.11.005 doi: 10.1016/j.eap.2021.11.005
[31]	Mao R, Shen W, Yang S (2024) Can passive monetary policy decrease the debt burden? J Econ Dyn Control 159: 104802. https://doi.org/10.1016/j.jedc.2023.104802 doi: 10.1016/j.jedc.2023.104802
[32]	Marcos SS, Vale S (2024) Is there a nonlinear relationship between public investment and private investment? Evidence from 21 Organization for Economic Cooperation and Development countries. Int J Financ Econ 29: 887–902. https://doi.org/10.1002/ijfe.2712 doi: 10.1002/ijfe.2712
[33]	Mendicino C, Pescatori A (2004) Credit frictions, housing prices and optimal monetary policy rules. Available from: http://repec.org/mmfc05/paper67.pdf.
[34]	Menguy S (2024) Dilemma for fiscal policies: supporting economic activity, or ensuring public debt sustainability?. J Econ Anal 3: 147–162. https://doi.org/10.58567/jea03020010 doi: 10.58567/jea03020010
[35]	Michelis A, Lofstrom G, McHenry M, et al. (2024) Has the inflation process become more persistent? Evidence from the major advanced economies. FEDS Notes 2024-07-19-3, Board of Governors of the Federal Reserve System (U.S.).
[36]	Mountford A, Uhlig H (2009) What are the effects of fiscal policy shocks? J Appl Econ 24: 960–992. https://doi.org/10.1002/jae.1079 doi: 10.1002/jae.1079
[37]	Rachel L, Summers L (2019) On secular stagnation in the industrialized world.
[38]	Ratto M (2008) Analysing DSGE models with global sensitivity analysis. Comput Econ 31: 115–139. https://doi.org/10.1007/s10614-007-9110-6 doi: 10.1007/s10614-007-9110-6
[39]	Resende C (2007) Cross-country estimates of the degree of fiscal dominance and central bank independence. Bank of Canada Working Paper 2007-36. https://doi.org/10.34989/swp-2007-36 doi: 10.34989/swp-2007-36
[40]	Rodriguez-Rodriguez F, Hierro L, Garzon A (2024) Fed and ECB reaction functions during quantitative easing: Three phases of monetary policy, both conventional and unconventional. J Policy Model 46: 928–945. https://doi.org/10.1016/j.jpolmod.2024.03.003 doi: 10.1016/j.jpolmod.2024.03.003
[41]	Schabert A (2006) Central bank instruments, fiscal policy regimes, and the requirements for equilibrium determinacy. Rev Econ Dyn 9: 742–762. https://doi.org/10.1016/j.red.2006.08.001 doi: 10.1016/j.red.2006.08.001
[42]	Schmitt-Grohé S, Uribe M (2005) Optimal fiscal and monetary policy in a medium-scale macroeconomic model. NBER Macroecon Annu 20: 383–425.
[43]	Shvets S (2023) Dominance score in the fiscal-monetary interaction. Natl Account Rev 5: 186–207. https://doi.org/10.3934/NAR.2023012 doi: 10.3934/NAR.2023012
[44]	Tian H, Wang C, Zhang C (2025) The effects of fiscal stimulus under monetary accommodation. J Macroecon 85: 103691. https://doi.org/10.1016/j.jmacro.2025.103691 doi: 10.1016/j.jmacro.2025.103691
[45]	Traum N, Yang SS (2010) Monetary and fiscal policy interactions in the post-war U.S. Eur Econ Rev 55: 140–164. https://doi.org/10.1016/j.euroecorev.2010.11.009 doi: 10.1016/j.euroecorev.2010.11.009
[46]	White LH (2025) Should the Federal Reserve raise its inflation target? South Econ J 91: 1372–1390. https://doi.org/10.1002/soej.12737 doi: 10.1002/soej.12737
[47]	Woodford M (1995) Price-level determinacy without control of a monetary aggregate. Carnegie-Rochester Conference Series on Public Policy 43: 1–46. https://doi.org/10.1016/0167-2231(95)90033-0 doi: 10.1016/0167-2231(95)90033-0

NAR-07-04-025-S001.pdf

Reader Comments

Your name:*

Email:*
© 2025 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)