Stability in the Balance – a Report on the Roles of Fiscal and Monetary Policy to the Expert Group on Public Economics

The economic situation of the past years, with multiple macroeconomic shocks and a low interest rate environment, has changed the conventional view of how stabilisation policy ought to be conducted. When the interest rate cannot be further reduced, monetary policy becomes less effective. This places increased demands on fiscal policy for business cycle stabilisation. In 2022, the economic situation rapidly changed. Increases in inflation and in interest rates raise several questions about how – and by whom – stabilisation policy should be conducted. Since aggregate demand is affected by both fiscal and monetary policy, the interaction between them is crucial for stabilisation policy to be effective. This is the case regardless of the economic situation. In this report to the Expert Group on Public Economics (ESO), which was previously published in Swedish (2022:3 Samspel för stabilitet), the balance between fiscal and monetary policy in Sweden is analysed. The report summarises the state of knowledge and gives both a theoretical and an empirical review of the effects of fiscal and monetary policy. The authors also discuss the appropriate division of responsibilities between fiscal and monetary policy under new economic conditions and call for clear guidelines regarding the role of fiscal policy in business cycle stabilisation. Since the original publication of this report in Swedish, facts and diagrams have been updated to include more recent data.