Summary: The implied impact of fiscal policy at the ZLB is the same channel as direct monetary policy (such as QE). Response is, yes but we have more certainty about the impact of fiscal policy.
Sidenote: As the central bank directly does balance sheet management instead of changing the cash rate, “monetary policy” looks closer to “fiscal policy”. There are four key differences though:
- Central banks have the incentive to reverse out unconventional policies once their job is done – politicians don’t.
- Central banks will respond to the data more quickly than politicians.
- The “inflation target” gives us the approved mandate of the central bank through the policy process. As a result, central bank action based on this view are appropriate – as long as the instrument used is assumed to not redistribute over the economic cycle.
- Central banks don’t have a direct mandate to redistribute – elected officials do. For central banks to use a tool that redistributes, they have to be given permission by a democratic government.