An Analysis of Fiscal and Monetary Policies

GAO analyzed the Nation's fiscal and monetary policies with a view toward possible changes. This report provides an overview of the issues and tradeoffs currently being debated within the economic policy community. A wide range of experts from academia and the business and financial communities were consulted.

Business and financial leaders, while expressing concern that monetary ease might refuel inflation, were generally in favor of Federal Reserve actions to reduce interest rates. Among senior economists, there was substantial agreement that, while progress in reducing the rate of inflation is being achieved, a marginal expansion in the current growth of the money supply and a reduction in the budget deficits for fiscal year 1984 and beyond is desirable. The dominant view supports an approach to an economic policy built around the following principles: (1) policy should be based on a long-term objective of moderating the inflation rate; and (2) unemployment should not be reduced by either expansive monetary or fiscal policy to levels where inflationary pressures are renewed. The exact magnitude of an inflationary unemployment rate is the subject of some debate among economists, but it is now generally thought to be above the 4 percent rate traditionally used as a benchmark; (3) adjustments in policy should be gradual and moderate so as to reduce the great uncertainty and instability now existing in financial markets; (4) long-term growth should be a paramount goal in policies to stimulate investment in the economy; and (5) monetary and fiscal policy should be based on a consistent set of long-term employment, price level, and economic growth goals for the economy that are both desirable and achievable.