Fritz Zurbrügg: Fiscal and monetary policy – interdependence and possible sources of tension Speech by Mr Fritz Zurbrügg, Member of the Governing Board of the Swiss National Bank, at the University of Lucerne, Lucerne, 21 November 2012. *  *  *  Ladies and Gentlemen, It is a great pleasure for me to be giving this presentation at the University of Lucerne this evening. Tonight’s topic is one that has interested me for some time. During my ten years at the International Monetary Fund, I repeatedly dealt with questions of fiscal and monetary policy and the interplay between them – albeit in a general and rather abstract way. Over the past six years at the Federal Finance Administration, my work was focused on fiscal policy, and in particular its implementation. This summer, I transferred to the Governing Board of the Swiss National Bank (SNB), and now have the unique opportunity, and the privilege, to focus on monetary policy. Although it is probably a little early for me to be making definitive speeches on both of these economic policy areas, I would like to share a few initial thoughts with you. Introduction In some countries, the scope for fiscal policy action has recently come up against its limits. Governments today find themselves in the position of being virtually unable to finance their normal range of activities, meaning that there is also no scope left for discretionary economic stimulus measures.
This is essential in enabling it to react to new challenges, and to smooth the economy in the event of a crisis. Thus, budget soundness is not an end in itself, because it fosters employment and prosperity. Fiscal policy thus pursues a similar goal to monetary policy. By creating favourable conditions for lasting and balanced economic growth, they both foster a prosperous society. The economic policy goals of monetary and fiscal policy are closely intertwined – or even overlapping. In both of these economic policy areas, sustainability is key: Fiscal policy can only ensure the lasting achievement of its goals if public finances remain healthy over the long term. Monetary policy, for its part, should focus on the medium to long term, because any economic stimulus motivated by short-term considerations carries the risk of raising inflation expectations. To recap: The goals of fiscal and monetary policy overlap to a large extent, which means that in normal times there should be no tension between the two policies. Nevertheless, there is a strong complementarity between fiscal and monetary policy, as their operations have a reciprocal impact as regards both the financial markets and the real economy. Let’s look at the financial markets first (cf. chart 2). Monetary policy steers a reference interest rate on the money market, which is used as a basis for the valuation and trading of securities such as government bonds on the financial market. If monetary policy is credible and succeeds in ensuring price stability, inflation expectations are low and well anchored.