Coordination between Fiscal and Monetary Policies: Mode Selection and Mechanism Analysis

Abstract

At present, strengthening the coordination between fiscal policy and monetary policy is China’s primary means of expanding domestic demand. Identifying the optimal policy mix is crucial for improving macroeconomic regulation and pursuing progress while ensuring stability in China’s economic development. Under the Rubin Causal Model (RCM) framework, this paper employs a semi-parametric method that combines propensity score weighting with local projections to identify China’s fiscal and monetary policy mixes from 2000 to 2020 and to estimate their impact on economic growth and financial risks. The results indicate that the mix of proactive fiscal policy and prudent monetary policy performs best in balancing multiple objectives, such as stabilizing growth, preventing risks, and expanding domestic demand. Further transmission mechanism analysis reveals that this policy mix drives real consumption and investment through income and expectation channels . Meanwhile, it promotes economic growth and constrains credit expansion to reduce macro-leverage ratios, effectively preventing and containing financial risks. This paper provides a quantitative basis for strengthening the coordination of fiscal and monetary policies, offering more precise policy choices and feasible paths for pursuing economic progress while ensuring stability. In the long run, barring extreme external shocks, the mix of proactive fiscal policy and prudent monetary policy remains the primary choice for China to coordinate stable growth and risk prevention. If short- term economic pressure necessitates phased adjustments to the policy mix, attention must be paid to the dynamic coordination of aggregate and structural tools to improve the precision of policy regulation.

Keywords

fiscal policy / monetary policy / policy coordination / policy effects

RIGHTS & PERMISSIONS

Higher Education Press