Why not rely on monetary policy to stimulate the economy and focus fiscal policy on longer term issues?
As Chairman Bernanke recognized in his most recent speech, monetary policy has an essential role to play in maintaining demand and growth as well as in combating financial instability. In the current context however it is best complemented by fiscal policy for a variety of reasons: (i) in normal times fiscal policy is faster acting than monetary policy, and given the financial problems it may be even more true today. (ii) proper fiscal policies can target the innocent victims of recession and can directly promote job creation (iii) full reliance on monetary policy could easily mean lowering interest rates to levels that would be problematic for the dollar, commodity prices, future asset bubbles and moral hazard (iv) in a situation where policy impacts are uncertain it is most prudent to rely on a diversified set of stimulus measures. 3. How great is the risk of overheating the economy and causing inflation? Should a decision on fiscal stimulus await definitive evidence that the economy
