The Equivalence of Fiscal and Exchange Rate Monetary Targetting

There have been a number of favorable posts recently from market monetarists in favour of swiss style exchange rate targeting as a means of escaping the ZLB.

How different is this from fiscal policy?  In one sense it is the same.

From a circuitist perspective if the central bank purchases financial assets denominated in another currency to deflate the exchange rate then the real value of the government debt will also deflate by the same amount.

If however the central bank purchased bonds on the secondary market of the same amount and there was no expectation of there repayment then the value of the government debt is deflated by the same amount.

in both cases the price neutral fiscal ceiling of the state is raised and government spending- at the ZLB – can expand; reflating the economy.

So at the ZLB -with expectations that the monetary injection is permanent and the asset is no redeemed (destroying the money created) they are fully equivalent.

So why argue about the relative merits of fiscal and monetary policy?



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