Monetary and fiscal policy work in complementary fashion to address internal and external imbalances. The Swan diagram captures the interaction. The model defines four “zones of economic discomfort” based on the four possible combinations of internal overheating versus underperformance relative to GDP growth potential and external overshooting versus undershooting of a current account target. Based on an economy’s position within the Swan diagram, recommendations for expansionary versus contractionary monetary and fiscal policy emerge. In the Malaysian case for the late 2010s, the model yields a recommendation for contractionary monetary policy and expansionary fiscal policy. However, Malaysia at the time did not have the fiscal space to implement such a program. Taking a broader perspective, the conclusion is that Malaysia should address its imbalances as structural in nature rather than relying on countercyclical policy.
Review the options below to login to check your access.
Log in with your Cambridge Aspire website account to check access.
If you believe you should have access to this content, please contact your institutional librarian or consult our FAQ page for further information about accessing our content.