But here I will abstain from all of these financial stability consequences and just focus on output and inflation. So monetary policy influences the effectiveness of fiscal policy, and vice versa. The important thing to remember is that in order to effectively stabilize the economy, we need a well-aligned monetary-fiscal policy mix.
A central bank combatting low inflation would benefit from loose fiscal policy, while a crisis-fighting fiscal authority would gain from the support of accommodative monetary policy. Of course, properly aligning monetary and fiscal policy may be more difficult in a monetary union that consists of a single central bank and many different national fiscal authorities.