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the interest rate becomes extremely high. Analogously, as the
interest rate increases, inflation falls from extremely high when
the monetary policy is extremely expansionary to extremely low
when the policy becomes extremely restrictive.

In the euro area policy-mix is based on the common monetary
policy for all members of the Monetary and Economic Union
(EMU) and national fiscal policies. Here, we should refer to the
results of analyses conducted by C. Badarau and G. Levieuge
who concentrated on studies of policy-mix suitable to the
monetary union in a context of financial heterogeneity. Using
dynamic, stochastic general equilibrium model (DSGE), they
came to several conclusions. First of all, they have ascertained
that centralized monetary policy was more advantageous for the
monetary union than alternative national monetary policies.
Also, they have found that national budget policies can mitigate
cyclical divergences. Nevertheless, the analysis of various cases
of policy-mix shows the certain advantage of the common
budget and it allows better stability of price divergence in
EMU.

In the case when the economic authorities are unwilling to
cooperate with each other, the Nash equation generates higher
levels of inflation and lower levels of production compared with
the best solution achievable under the given circumstances (but
still not optimal, because of the disturbances caused by the fiscal
policy). The reason for this is a mismatch between the central
bank seeking to reduce production and inflation below levels set
by the government and the government pursuing a fiscal policy
increasing inflation and production above levels defined by the
central bank. This is a case of an inflationary fiscal policy partly
offset by the monetary policy.

A fiscal policy may influence inflation (based on the Fiscal
Theory of the Price Level (FTPL) developed by Woodford

and

modified by other authors), because when the debt is high a
temptation arises to reduce its real value by increasing inflation
rather than taxes. In the case of the aforementioned ‘fiscal
domination’, a disparity between the monetary and fiscal policy
goals may significantly weaken the central bank’s position thus
leading to higher inflation.

From the perspective of the monetary and fiscal game, inflation
and economic growth are the lowest in an environment
characterized by a combination of extremely restrictive monetary
and fiscal policies. A monetary policy that is becoming more and
more expansionary (successive cuts in interest rates) increases
inflation and the rate of GDP growth. On the other hand, an
increasingly expansionary fiscal policy (expanding the budget
deficit) pushes up inflation and the rate of GDP growth. The
highest rates of inflation and GDP growth are observed in
countries the economic authorities of which have chosen
extremely expansionary monetary and fiscal policies. I.
Woroniecka-Leciejewicz noted that the restrictiveness of a
monetary policy depends on the government’s fiscal policy. To
prevent inflation from rising too high, the central bank tightens
up monetary policy as the government makes its fiscal policy
more expansionary. On the other hand, the central bank’s
monetary policy has influence on how restrictive or
expansionary policy will be pursued by the fiscal authorities. An
increasingly restrictive monetary policy leads to a more
expansionary fiscal policy, because a higher interest rate

WORONIECKA – LECIEJEWICZ I.: Problem wyboru policy – mix w grze

fiskalno-

monetarnej z zastosowaniem funkcji logistycznej, „Studia i Materiały

Informatyki Stosowanej”, Vol. 4, No. 8, 2013, 29 – 38 pp.

BADARAU C., LEVIEUGE G.: Which policy-mix to mitigate the effects of

financial heterogeneity in a monetary union?, “LAREFI Working Paper” No. CR11-
EFI/09, 2011, 2 – 3 pp.

DIXIT A., LAMBERTINI L.: Interactions of Commitment and Discretion in

Monetary and Fiscal Policies, Princeton University, 2003; KUTTNER K. N.:

Kombinacja (policy mix) polityki pieniężnej i fiskalnej z perspektywy amerykańskiej,

XXII Konferencja Naukowa NBP, Reformy strukturalne a polityka pieniężna” Falenty
2002.

WOODFORD M.: Fiscal Requirements for Price Stability, Journal of Money, credit

and Banking, Vol. 33, 2001, 669-728 pp.

SARGENT T., WALLACE N.: Some Unpleasant Monetarist Arithmetic, Federal

Reserve Bank of Minneapolis Quarterly Review, Vol. 5, 1981, 1-17 pp.

environment requires a more pro-growth fiscal policy to boost
economic growth, which usually increases the budget deficit.

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.

In an economy with zero-bound interest rates, the monetary
policy effectiveness can be blunted by the liquidity trap, which
emerges when the monetary policy is unable to stimulate
demand because interest rates cannot be reduced any lower.

Studies on fiscal policy effectiveness under zero-bound interest
rates conducted in many countries show that the zero-lower
bound interest rates make fiscal expansion more effective,
particularly in economies pursuing an accommodative monetary
policy (maintaining low interest rates). A. Szyma

ńska argues

that fiscal policy is more effective during recession that in a
period of stable growth, because recession tends to be
accompanied by low interest rates.

According to L.H.

Summers, the main reason why fiscal policy outperforms
monetary policy during a crisis is that its instruments stimulate
the economy faster and more efficiently.

The most recent crisis

of 2008 caused many national governments to relax fiscal
discipline, as the monetary policy they had pursued so far failed
to deliver the desired results in a low-interest rate environment.
The discretionary fiscal policies they formulated to handle the
crisis impacts included fiscal packages, which were designed to
rebalance financial systems and increase total demand in the
economy.

A.Rzońca has stated that a zero-bound interest rate is supportive
of fiscal stimulation

, because it creates conditions for the

government to run a substantial budget deficit by reducing the
cost of borrowing, etc.

He also argues that a zero-bound

interest rate policy can make production factors less productive
and reduce total demand. Low interest rates have a negative
effect on the rate of productivity growth in the long term, mainly
because they contribute to a lower rate of economic restructuring
and limit borrowing opportunities available to new organizations
and new projects. The financial sector’s uncertainty as to the
likely course of events in an economy operating zero-bound
interest rates also reduces total demand, discouraging the use of
some entities’ savings to fund the expenditures of others. A low
rate of growth usually leads to problems with reducing the
general government deficit, which frequently follows a financial
crisis. In most cases, a zero-bound interest rate contributes to a
larger deficit, because it makes the central bank appear not to be
able to stimulate total demand and eliminates the risk of a
crowding-out effect.

According to P. Ciżkowicz and A.

Rzońca, a financial crisis lessens the influence of interest rate
reduction on total demand, because it involves a falling natural
interest rate and stronger frictions in financial markets. The
authors also maintain that in the aftermath of the burst of the

WORONIECKA – LECIEJEWICZ I.: Problem …. op.cit.

WOJTYNA A.: Skuteczność polityki pieniężnej w warunkach niskiej inflacji:

problem zerowej granicy nominalnych stóp procentowych, „Bank i Kredyt” No. 7,
2001.

SZYMAŃSKA A.: Efekty polityki fiskalnej w warunkach niskich stóp

procentowych –

przegląd literatury, „Studia Prawno-Ekonomiczne”, Vol. XCIII, 2014,

347 p.

SUMMERS L.H.: Fiscal Stimulus Issues, Testimony before the House Budget

Committee, Washington, 2008: http://larrysummers.com/wp-
content/uploads/2012/10/1-16-08_Fiscal_Stimulus_Issues.pdf, (access: 26.11.2017).

SPILIMBERGO A., SYMANSKY S., BLANCHARD O., COTTARELLI C.: Fiscal

Policy for the Crisis, IMF Staff Position Note, 2008/1, 2 p.
https://www.imf.org/external/pubs/ft/spn/2008/spn0801.pdf, (access: 26.11.2017).

ZOŃCA A.: Kryzys banków centralnych. Skutki stopy procentowej bliskiej zera,

C.H. Beck, Warsaw, 2014.

ARELLANO C., CONESA J. C., KEHOE T. J.: Chronic Sovereign Debt Crisis in

the Eurozone, 2010-2012, “Federal Reserve Bank of Minneapolis Economic Policy
Paper”, No. 4., 2012; CONESA J.C., KEHOE T.: Gambling for redemption and self –
fulling debt crises, Staff Report from Federal Reserve Bank of Minneapolis, no. 614,
2012.

ZOŃCA A.: Kryzys …, op.cit.

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