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In considering the issue of coordination between monetary policy and fiscal policy, or a lack of it, one has to take account of the so-called zero lower bound on nominal interest rates, also known as a zero-bound (ZLB) problem. The problem basically is that nominal interest rates cannot drop below zero. Many economists argue that a near-zero interest rate encourages fiscal stimulation that certainly has influence on the type of decisions made by the central bank. Some studies point to higher effectiveness of fisca...

The economic authorities’ decisions not only influence the economy, but also induce interactions between economic authorities. The recent crisis has provided evidence that the fiscal policy significantly shapes the decisions of independent central banks responsible for ensuring price stability – the main objective of monetary policy. This mechanism, described by the fiscal theory of the price level, is not a new discovery, because it has been debated on since the 1990s. The fiscal theory of the price level holds t...