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CHRONIC. Articulating an expansionary fiscal policy with a restrictive monetary policy makes them both ineffective. Proof by example.
By Patrick Artus
© Mandel Ngan/AFP
Published on
Lhe financial markets reacted strongly to the combination of fiscal policy and monetary policy. In the United States, both economic policies are restrictive. Between 2021 and 2022, the public deficit fell by more than 8 points of GDP: the Federal Reserve, since the spring of 2022, has shown its desire to fight inflation and raise its interest rates as much as necessary.
But this rise in interest rates may be limited: the restrictive budgetary policy reduces domestic demand – for example, it leads to a 5% fall in disposable household income – and this slowdown in domestic demand allows the Federal Reserve to limit themselves to a moderate increase in interest rates – up to 5% when the peak of inflation was 9.4…
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