The Empirical Study of the Interaction between Fiscal Policy and Monetary Policy

Based on the MS-VAR model and the annual data from 1980 to 2009,this paper empirically tests the different policy regimes of fiscal policy and monetary policy in determining the price level.The results indicate that monetary policy was dominance regime pre-1997 periods and after 1997 it can be appropriately described as the fiscal policy dominance regime.Then,this paper tests the robustness of these results by verifying Ricardian Equivalence and wealth effect for the sub-sample separately.Finally,by using the monthly data of 1996-2010 and MS-OLS model the authors also examine the relationship between the fiscal and monetary policies and the price level,and find that the complementary macroeconomic policies of China can play an effective role to control inflation.