Monetary Policy Dominates

Scott Sumner once used the analogy of arm wrestling with his daughter to describe why monetary policy always dominates fiscal policy.

Scott explained that no matter how hard his daughter tried to win the arm-wrestling contest he would always apply just enough pressure to offset her efforts and keep her in check. Likewise, no matter how expansionary or contractionary fiscal policy may be, at the end of the day the Fed has the ability to offset such actions and place aggregate demand where it so chooses.

This point is vividly illustrated in the article titled Money Dominates by Steve Hanke. Read it.

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About David Beckworth 240 Articles

Affiliation: Texas State University

David Beckworth is an assistant professor of economics at Texas State University in San Marcos, Texas.

Visit: Macro and Other Market Musings

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