Monetary policy is related to fiscal policy by an intertemporal budget constraint, which says that the present value of future surpluses (including central bank transfers) has to be able to pay off the current govemment debt. This present value budget constraint is at the hearth of recent research on the theory of price determination. Two types of policy regime are defined in the new theory. First is the fiscal dominant regime in w hi ch the price level is determined by the dietates of fiscal solvency. Underthis regime, the central bank could not be responsible for maintaining price stability because it does not have the "functional independence" w hi ch is necessary to control the price level independently of the dietates offiscal solvency. The second regime is called monetary dominant regime in which fiscal policy guarantees that price level is determined independently of govemment's present value budget constraint. U nder this regime, the central bank could be responsible for price stability because it has the "functional independence". So, it is shownin this paper that it is very important to determine whether the regime, which is shaped by the interaction between monetary en d fiscal policy, is monetary dominant or fiscal dominant in order to analyze the monetary policy.
Article Language: Turkish English