ABSTRACT
This chapter provides an assessment of the conduct of fiscal and monetary policies in Organization for Economic Cooperation and Development (OECD) economies since the early 1970s. It discusses four issues: the stance of policies up to the second oil shock, the current instrument-objectives setting, the rationale for the increasing adoption of medium-term budgetary and monetary objectives and the problems of ensuring consistency between short-term actions and medium-term goals. To the extent that central banks can contain the pressures stemming from the mix of restrictive monetary targets and expansionary budgets, monetary and fiscal policies might be assigned to different objectives: inflation control and short-term employment support respectively. However, persistent imbalance between the two 'instruments' may result in diminishing fiscal effectiveness because of cumulative budget financing difficulties, output and employment gains may be progressively eroded through upward pressures on interest rates, as a result of either the 'crowding out' of private demand or fears of future monetary accommodation and inflation.
