Modeling the Interaction of Fiscal and Monetary Policy in the Current Environment

In the paper theoretical analysis of the interplay between fiscal and monetary policies are presented. The paper explores concepts such as the Fiscal Theory of the Price Level, fiscal dominance, financial repression, and Ricardian equivalence. The evolution of approaches to modeling the interaction of fiscal and monetary policies is reviewed, highlighting models based on active and passive policy regimes, game-theoretic frameworks, differential equation systems, and Markov-switching models. The analysis examines the foundational rules governing the conduct of monetary and fiscal policy, and the transmission mechanism of fiscal impulses through the fiscal multiplier to inflation, as well as via key interest rate decisions. A semi-structural quarterly forecasting model is adopted to simulate the transmission of fiscal stimulus, with the responses of key indicators to changes in selected model parameters being modeled. Empirical evidence suggests that Russia is currently experiencing a combination of active fiscal and active monetary policies. This configuration is associated with elevated inflation, potentially exhibiting instability. The Bank of Russia is implementing a policy consistent with a Taylor rule. Inflation growth has stabilized above the target level, necessitating the continuation of active monetary policy until a sustained downward trend in inflation is established and the inflation target is achieved.

fiscal policy, monetary policy, fiscal dominance, Taylor rule, Fiscal Theory of the Price Level, financial repression, Ricardian equivalence