How likely is the Fed to go along with a plan that involves coordinated monetary and fiscal policy?
Dialynas: This marrying of fiscal and monetary policies would necessarily require that the Fed suspend its independence. The sacrificing of independence is well justified given the present U.S. protectionist sentiment. Current Fed Chairman Ben Bernanke argued in 2003 that the Bank of Japan should relinquish its independence to better enable the coordination of Japanese monetary and fiscal policies and avoid further deflation. The zero interest rate policy in Japan required that the Bank of Japan sacrifice its autonomy. The Bank of Japan, in announcing the end of zero interest rates, is now retrieving its independence. In the same vein, the U.S. Fed should welcome the chance to participate in a coordinated policy to restore international stability and avert direct tariffs. Q: What are the risks if the current mix of fiscal and monetary policy continues? Dialynas: The ongoing imbalances in global trade and financial flows are the direct externality of misguided policies, based on convent
