On July 20, 2017, Rudy Professor Eric Leeper testified before the Subcommittee on Monetary Policy and Trade (U.S. House of Representatives). The title of the hearing was “Monetary vs. Fiscal Policy.” In his opening statement, Prof. Leeper, pointed out that the title did not serve to frame the discussion in a constructive manner. Fundamental economics, he argued, dictated a more appropriate title: “Monetary and Fiscal Policy.”
Indeed, Prof. Leeper, a world-renowned monetary economist, has been thinking about his suggested title throughout his illustrious career. He established the importance of monetary and fiscal policy coordination in a seminal paper published in 1991 in the Journal of Monetary Economics. In that pathbreaking work, he defined the terms “active” policy and “passive” policy, which have become standard lexicon in the literature.
Prof. Leeper proceeded to explain the importance of thinking about monetary and fiscal policy in the active / passive framework. He carefully reasoned how perverse consequences can easily be attained if policy is conducted in isolation. Only when considering policy jointly can it be truly effective. He then provided several historical references that represented successes in policy coordination and failures.
Let’s hope our leaders in Washington D.C. heed this important advice.