I think this is something we may now need to reconsider for at least a couple of reasons. Monetary policy and fiscal policy are probably more dependent on each other than we usually think, and this dependence has become even clearer as the macroeconomic environment has changed quite a lot in recent decades. For quite long periods, it may indeed work well if monetary policy is focused on maintaining the inflation target and fiscal policy on keeping track of public finances – that they manage their own business, so to speak. Indirectly, the two policy areas nevertheless provide valuable support to each other. Assume, for example, that inflation begins to rise rapidly and risks becoming persistently too high, and that the central bank therefore raises interest rates in order to dampen demand in the economy. The higher interest rate increases government interest expenditure and weakens public finances. Of course, how much depends, among other things, on how large the debt is from the start and by how much the central bank raises the interest rate. If the economic agents trust that fiscal policy will stabilise public debt, they will expect taxes to be raised or expenditure to be reduced, or both. They will adjust their behaviour accordingly and  9  A policy regime with active monetary policy and more passive fiscal policy is sometimes called a regime with ‘monetary dominance’; see, for example, Leeper (2018, 2021). 6 [17]  hold back on their consumption and investments in preparation for the expected tightening.
In the justification for its new strategy, the Federal Reserve notes that the level of the policy rate that is compatible with maximum employment and 4 For a more detailed account, see for example, Jansson (2020). 5 It is difficult to know exactly where this bound lies, but my guess is that, in Sweden, it is slightly lower than –0.5  per cent, as the Riksbank’s repo rate was for a period, and it probably also depends on how long the repo rate remains at negative levels. 4 [17]  long-term price stability has fallen relative to its historical average. The policy rate will therefore be limited by its lower bound more often than has been the case in previous periods. In order to anchor long-term inflation expectations at 2 per cent and prevent them from falling below this level – which would make the lower limit binding even more often – it has chosen to specify the target as an average of 2 per cent. This makes it clear that ‘bygones’ are not ‘bygones’: if inflation has been below the target for a period, this must be compensated for by inflation then being above target for a period.6 In turn, as I have just mentioned, the ECB has moved on to a symmetrical target of 2 per cent in the medium term. In practice, this means that the target has been raised slightly, as previously inflation should have been “below, but close to, 2 per cent”.