This paper is a Griswold Center for Economic Policy Studies Working Paper. Its content was originally prepared for the Federal Reserve Bank of Kansas City’s 2021 Jackson Hole Symposium.
The subject of this panel is a hardy perennial; it has been touched upon many times in Jackson Hole’s illustrious history. However, the specific issues emphasized under that general heading have differed dramatically over time.
Starting at the beginning, it turns out that I delivered the very first paper at the very first Jackson Hole conference, in person of course, in 1982. The title was: “Issues in the Coordination of Monetary and Fiscal Policy.”2 Notice the word “coordination.” The big issue of the day was the clash between tight monetary policy and loose fiscal policy.
Things have changed a lot since then, and not just my age. When I spoke on this topic again on a panel here in 2012, the focus was much closer to today’s. In preparing for this session, I read what I wrote then and found, unsurprisingly, that my views on fiscal-monetary interactions have not changed much in just nine years. Sorry—but none of you have checked back to that 2012 symposium, anyway.
Back to the summer of 1982. Economists were then concerned about the sharp clash between Paul Volcker’s tough anti-inflation policies and Ronald Reagan’s huge tax cuts, which had passed a year earlier and were being phased in over several years. The tax cuts were clearly going to blow a big hole in the budget and give aggregate demand a big boost. The conventional wisdom of the day—which, by the way, came true—was that the policy mix of loose fiscal policy and tight money would raise real interest rates and reduce the share of investment in GDP.4 The unemployment rate in August 1982 stood at 9.8 percent, and one of my discussants that day, the estimable James Tobin, was deeply worried that the Fed’s tight monetary policies would stifle the recovery.