Monetary, prudential and fiscal policy: how much coordination is needed?*

Abstract

Prior to the crisis, central bankers, prudential authorities and fiscal policy-makers had clearly defined roles with little or no conflict. The crisis revealed a variety of overlaps, where policies seem to overlap in important ways. Does this mean that three policy realms can no longer remain separate? I address the question by examining the relationship of monetary policy to financial stability, the potential role for prudential policy in macroeconomic stabilization, and the importance of monetary and fiscal policy coordination. My conclusion is that the pre-crisis consensus largely holds. Each policy authority continues to have a distinct job. Monetary policy tools should retain their focus on price stability. Prudential authorities should retain their focus on financial stability. Similarly, in almost all instances, fiscal policy should retain their traditional focus on providing public goods and social insurance.