Economic Commentary

Are fiscal and monetary policy pulling in the same direction?

Alexander Czarnota, Marie Hesselman, Jyry Hokkanen and Anna Seim

No. 6 2026, 27 August

Summary

In this commentary, we examine how fiscal and monetary policy in Sweden have been conducted 2006–2025.¹ In the analysis, we use ex-ante measures of fiscal and monetary policy in the form of forecasts for the coming year at the same point in time. We assess the policy stance based on deviations from the estimated level of the long-term neutral interest rate and the surplus target, respectively.

Monetary policy has been expansionary when inflation forecasts have been lower than the target and contractionary when they have been higher than the target. However, we do not find any clear connection to the economy's resource utilization. Monetary policy thus seems to have reacted to a greater extent to deviations from the inflation target than to business cycle fluctuations. Fiscal policy has generally been countercyclical, that is, expansionary when forecasts have indicated weak resource utilization and low inflation and contractionary when they have indicated the opposite.

The analysis indicates that fiscal and monetary policy have mainly pulled in the same direction, that is, both have been either expansionary or contractionary at the same time. This should have mitigated economic fluctuations. An explanation for the results could be that severe negative supply shocks have been uncommon during the majority of the studied time period. This has resulted in few serious goal conflicts between fiscal and monetary policy.

Authors: Alexander Czarnota, Marie Hesselman and Jyry Hokkanen are employed at the Monetary Policy Department. Anna Seim is Deputy Governor.² The commentary is based on analysis that Anna Seim presented in a policy panel at the conference New Challenges for Monetary-Fiscal Policy Interactions, Sveriges Riksbank, October 2025.³

Introduction

It is generally easier to stabilize the business cycle and inflation if fiscal and monetary policy do not counteract each other.⁴ In this commentary, we study the stance of fiscal and monetary policy between 2006 and 2025. We follow Calmfors et al. (2022) and analyze how fiscal and monetary policy have related to the inflation target, whether they have been pro- or countercyclical and whether they have pulled in the same direction.⁵ Our contribution in relation to previous literature is that we use forecasts, the Riksbank's estimate of the neutral interest rate and a time period that also includes the high inflation period after the pandemic. We start from the forecasts made for the coming year when the government and the Riksbank made their decisions.⁶ We use a measure of neutral interest rate that we believe reflects the Riksbank's perception of its level at the time of decisions.⁷

Monetary policy has been expansionary when inflation has been low

The Riksbank's most important tool for influencing demand and inflation is the policy rate.⁸ To be able to assess whether monetary policy is expansionary or contractionary, one must first have an idea of what level of the interest rate is "neutral", that is, is consistent with normal resource utilization.⁹ We therefore start from the assessed intervals of the long-term neutral interest rate that the Riksbank has published with some irregularity since 2006. We believe that it is a good approximation of how the Riksbank perceived the neutral interest rate in real time and disregard that temporary disturbances can make the neutral interest rate short-term higher or lower than its long-term level. To capture that the neutral interest rate has changed continuously while the Riksbank has published its assessments less frequently, we choose to interpolate the midpoints of the published intervals (see Chart 1).¹⁰

Chart 1. The Riksbank's assessment of long-term neutral interest rate 2006–2025 Percent Note. The red and light blue line refers to the Riksbank's historical assessment of the upper and lower interval of the long-term neutral interest rate. The intervals were updated 2010, 2017 and 2024. The blue line refers to the interpolated mean of the assessed neutral interest rate. Source: Sveriges Riksbank.

We classify monetary policy as expansionary when the policy rate is lower than the long-term neutral interest rate. In Chart 2 it is illustrated how monetary policy has varied according to this measure on the y-axis against the deviation from the inflation target on the x-axis. A positive value on the y-axis means that monetary policy has been expansionary, while a negative value means that it has been tightening. The deviation from the inflation target is calculated as the Riksbank's forecast for the average CPIF inflation the coming year minus 2 percent. A positive value thus reflects that inflation is expected to be above the target and a negative value that it is expected to be below the target. We expect a negative correlation, that is, that monetary policy has been tightening when the forecast has indicated that inflation will be above the target and vice versa.

Most observations are in the upper left quadrant. This means that it has been more common that the inflation forecast for the coming year has been lower than 2 percent and that monetary policy has been expansionary. 2023 was the opposite; the inflation forecast was 0.5 percentage points above the target at the same time as monetary policy was tightening with a policy rate 1.6 percentage points above the neutral interest rate. There are some single years that deviate, that is, when monetary policy was contractionary despite inflation forecasts being below target the coming year, or vice versa. But by and large, monetary policy has been conducted in a way that is consistent with the inflation forecasts' deviations from the target. This is confirmed by the estimated regression line, which is illustrated by the blue line in the chart. It shows a negative relationship between the stance of monetary policy and the inflation deviation. An inflation forecast above the target has on average been associated with a policy rate above the neutral interest rate and vice versa. Monetary policy was clearly tightening 2023 and 2024, and the negative relationship between the stance of monetary policy and the inflation deviation becomes weaker if one excludes the high inflation years, as illustrated by the red line.

Chart 2. Stance of monetary policy and deviation from the inflation target Percentage points Note. On the x-axis is shown the Riksbank's forecast for CPIF inflation one year ahead minus the inflation target. On the y-axis is shown the neutral interest rate minus the policy rate at the time when the inflation forecast was made. The dots refer to the observations for respective year and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023 and 2024. Source: Sveriges Riksbank.

The negative relationship is somewhat stronger than what previous studies have found. The high inflation years contribute as noted above to the slope becoming steeper, but also the fact that we start from ex-ante estimates probably plays a role.¹¹ Monetary policy is also classified as expansionary to a greater extent.

It is rare that the economy's total production capacity is fully utilized. Most often, actual production is higher or lower than potential. It can also be expressed as that the GDP gap is negative or positive, or that the economy is in a downturn or upturn. It is not obvious that monetary policy should be conducted countercyclically among other things because the GDP gap can be negative at the same time as inflation is high. Chart 3 also shows that the relationship between the stance of monetary policy and resource utilization is weak. The blue line that illustrates the estimated regression line even shows that the relationship is weakly procyclical. It indicates that monetary policy has been contractionary when the Riksbank's forecast for the GDP gap next year has been negative and vice versa. The red line shows however that the relationship becomes weakly countercyclical when we exclude the high inflation years 2022, 2023 and 2024, which are red-marked in the chart. The red dots can be seen as an illustration that the Riksbank gave highest priority to the inflation target during the period 2022–2024.

Chart 3. Stance of monetary policy and resource utilization Percentage points Note. On the x-axis is shown the Riksbank's forecast for the GDP gap one year ahead. On the y-axis is shown the neutral interest rate minus the policy rate at the time when the GDP gap forecast was made. The dots refer to the observations for respective year and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023 and 2024. Source: Sveriges Riksbank.

Because the Riksbank's communicated intervals refer to the nominal neutral interest rate, we have chosen to analyze the stance of monetary policy in nominal terms. In economic theory, however, it is the real neutral interest rate that affects the economy's supply and demand. In Appendix B we therefore also analyze the stance of monetary policy in real terms. The results show that the relationships are even a little weaker when we use the real interest rate measure, even if the two measures of the stance of monetary policy follow each other closely over time.

Fiscal policy mostly expansionary during downturns

By conducting expansionary fiscal policy in downturns and contractionary policy in upturns, policy can contribute to business cycle fluctuations becoming smaller. An important part of fiscal policy's effect on the business cycle occurs automatically, because for example tax revenues decrease when activity in the economy decreases at the same time as certain expenses increase. If one wants to analyze to what extent fiscal policy has actively tried to influence the business cycle, that is, discretionary fiscal policy, it is therefore better to examine the structural saving that removes the business cycle effects.¹² One should at the same time keep in mind that the fiscal policy framework among other things means that periods with deficits should be followed by periods with surpluses for the surplus target to be reached over a business cycle. Because the surplus target after a deviation is not reached automatically in the future, it means that active discretionary measures need to be implemented which in turn has significance for the measure of fiscal policy's discretionary stance.¹³

Chart 4. Structural financial saving and resource utilization Percentage points Note. On the x-axis is shown the government's forecast for the GDP gap one year ahead. On the y-axis is shown the surplus target minus the government's forecast for the structural saving one year ahead. The dots refer to the observations for respective year and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023 and 2024. Source: Ministry of Finance.

In Chart 4 the stance of fiscal policy is shown on the y-axis and the government's assessment of resource utilization on the x-axis. Overall, fiscal policy has been expansionary, which is reflected in that most points are located in the two upper quadrants. In the majority of cases, this coincides with that resource utilization has been low. Policy has thus been countercyclical. There are however also several examples that fiscal policy has been procyclical during certain years, which is shown in the upper right and lower left quadrant. Many of these points are located relatively close to the x- or y-axis, which means that fiscal policy has been close to neutral or resource utilization normal. This does not however apply for 2011 when fiscal policy was contractionary despite resource utilization being assessed to become very low. Fiscal policy has more often been countercyclical, which is reflected in a weak negative correlation. The relationship is not affected significantly by whether the high inflation years are included or not. Excluding years that occur one year before a parliamentary election does not affect the relationship either even if some years stand out. Fiscal policy was for example unusually expansionary 2009 and 2025. It was also expansionary 2017 and 2021, despite resource utilization being expected to become higher than normal in the forecasts.

In Chart 5 we can see that there is a negative relationship between the stance of fiscal policy and inflation's deviation from the target. The relationship is negative, which means that fiscal policy has been more expansionary the lower inflation has been expected to become and vice versa. An argument for conducting a tight fiscal policy despite low resource utilization could be that inflation is high. It is however relatively few years that the government has expected that inflation will become higher than the target. In line with most others, the government was surprised by the inflation increase 2022. The forecasts made 2021 indicated that inflation would become lower than 2 percent and fiscal policy expansionary. Fiscal policy was changed in a mildly tightening direction autumn 2022 at the same time as the government forecasted that inflation would become just over 5 percent 2023. Fiscal policy that was announced 2023 was close to neutral at the same time as inflation was expected to become higher than 2 percent. Fiscal policy that was announced 2024 and 2025 was more expansionary at the same time as the forecasts for inflation indicated that it would fall below 2 percent. It is not clear that fiscal policy has taken greater consideration to inflation than before if one starts from the estimated regression lines. If one excludes the high inflation years, the negative relationship is even somewhat stronger, which is illustrated by the red line.

Chart 5. Structural financial saving and deviation from the inflation target Percentage points Note. On the x-axis is shown the government's forecast for CPIF inflation one year ahead minus the inflation target. On the y-axis is shown the surplus target minus the government's forecast for the structural saving one year ahead. The dots refer to the observations for respective year and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023 and 2024. Source: Ministry of Finance.

Fiscal and monetary policy have pulled in the same direction

In summary, fiscal policy has often been conducted countercyclically, but it is not as clear for monetary policy. However, fiscal and monetary policy have overall pulled in the same direction and thereby reinforced each other. Both policy areas have as a rule been expansionary at the same time, but only monetary policy was contractionary autumn 2024. The relationship does not change significantly if one excludes the high inflation years.

Chart 6. Stance of stabilization policy Percentage points Note. On the x-axis is shown the neutral interest rate minus the policy rate at the time when the decision was made. On the y-axis is shown the surplus target minus the government's forecast for the structural saving one year ahead. The dots refer to the observations for respective year and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023 and 2024. Sources: Ministry of Finance and the Riksbank.

An explanation for that fiscal and monetary policy have pulled in the same direction during most years is that no contradiction between the goals has existed. Inflation has most often been lower than the target and resource utilization weaker than normal. Economic policy has therefore been able to focus on stabilizing both inflation and resource utilization. That resource utilization has been lower than normal in several years despite the expansionary economic policy could reflect that large negative demand shocks have been common during the studied period.

At the same time, one should keep in mind that we study a special period with a prolonged low inflation and recurring large shocks. The economic-policy trade-off is more difficult if the economy is hit by a negative supply disturbance with high inflation and weak demand as a consequence. If fiscal policy stimulates the economy in such a situation, there is a risk that the policy rate needs to be raised so that inflation does not become too high.[^14]

Concluding discussion

Our analysis shows that fiscal policy as a rule has been expansionary when economic activity has been low. We find no such pattern for monetary policy. However, we find that monetary policy has been expansionary when forecasts have indicated that inflation will become lower than the target. This suggests that monetary policy has primarily reacted to deviations from the inflation target.

Our analysis shows that fiscal and monetary policy have mainly pulled in the same direction 2006–2025. It is a period that among other things is characterized by low inflation and a policy rate close to the lower limit but also a complicated supply and demand dynamics and high inflation in the wake of the pandemic. If negative supply disturbances become more common in the future, for example as a consequence of geopolitical instability and climate changes, goal conflicts may arise between fiscal and monetary policy. In such situations, it becomes important that fiscal and monetary policy do not counteract each other. We look forward to further research of relevance for this issue.[^15]

References

Calmfors, Lars, John Hassler and Anna Seim (2022), "Interaction for Stability – an ESO Report on the Division of Roles between Fiscal and Monetary Policy", Report to the Expert Group for Studies in Public Economics 2022:3, Swedish Government Official Reports.

Czarnota, Alexander and Pär Stockhammar (2026), "Fiscal policy effects on Swedish inflation", Studies in Fiscal Policy 2026/1, Swedish Fiscal Policy Council.

Swedish Fiscal Policy Council (2023), "Swedish Fiscal Policy – Swedish Fiscal Policy Council's Report 2023", Swedish Fiscal Policy Council.

Flodberg, Caroline (2024), "Structural Factors Determine the Interest Rate Level in the Longer Term", Economic Commentary No. 5, Sveriges Riksbank.

Lundvall, Henrik, Ingvar Strid and David Vestin (2025), "The neutral rate of interest – theory and evidence for Sweden", Staff memo, Sveriges Riksbank.

Seim, Anna (2024), "Neutral Interest Rate – Significance, Limitations and Assessment", speech 26 November, Sveriges Riksbank.

Walentin, Karl (2023) "Monetary and Fiscal Business Cycle Stabilization", Appendix 6 to the Long-term Survey 2023, SOU 2023:91.

Footnotes

APPENDIX A – Fiscal Policy Stance Measured by Financial Saving 12 APPENDIX A – Fiscal Policy Stance Measured by Financial Saving In the main text, we used structural saving to analyze how fiscal policy has been conducted in relation to the GDP gap, inflation, and monetary policy. In this appendix, we make the same analysis with financial saving – which also includes automatic stabilizers. Diagram 7 shows that the relationship between fiscal policy and resource utilization is stronger when we use the forecast for financial saving. Given that the automatic stabilizers co-vary with resource utilization, this is in line with what one can expect. Diagram 7. Financial Saving and Resource Utilization Percentage points Note. On the x-axis, the government's forecast for the GDP gap one year ahead is shown. On the y-axis, the surplus target minus the government's forecast for financial saving one year ahead is shown. The dots refer to the observations for respective years and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023, and 2024. Source: Ministry of Finance. Diagram 8 shows that also the relationship between fiscal policy and inflation is stronger when we use the forecast for financial saving. Given that the inflation forecasts have been positively correlated with the forecasts for resource utilization and thereby also the automatic stabilizers, this is also in line with what one can expect.

APPENDIX A – Fiscal Policy Stance Measured by Financial Saving 13 Diagram 8. Financial Saving and Deviation from the Inflation Target Percentage points Note. On the x-axis, the government's forecast for CPIF inflation one year ahead minus the inflation target is shown. On the y-axis, the surplus target minus the government's forecast for structural saving one year ahead is shown. The dots refer to observations for respective years and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023, and 2024. Source: Ministry of Finance. Finally, diagram 9 shows that fiscal and monetary policy overall have acted in the same direction when we use the forecast for financial saving instead of structural saving. The slope of the estimated regression line is similar to that in diagram 6, which indicates that the conclusion that fiscal and monetary policy have pulled in the same direction holds regardless of whether we use the forecast for structural saving or financial saving as a measure of fiscal policy.

APPENDIX A – Fiscal Policy Stance Measured by Financial Saving 14 Diagram 9. Stabilization Policy Stance Percentage points Note. On the x-axis, the neutral rate minus the policy rate at the time the decision was made is shown. On the y-axis, the surplus target minus the government's forecast for financial saving one year ahead is shown. The dots refer to observations for respective years and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023, and 2024. Sources: Ministry of Finance and the Central Bank.

Appendix B – Monetary Policy Stance Measured as the Deviation from the Real Neutral Rate 15 Appendix B – Monetary Policy Stance Measured as the Deviation from the Real Neutral Rate In the main text, we used the difference between the nominal neutral rate and the nominal policy rate to measure monetary policy stance and the relationship between inflation, the GDP gap, and fiscal policy stance. In this appendix, we instead use real rate deviations as a measure of monetary policy stance. We define the real neutral rate as the nominal neutral rate minus the inflation target and the real policy rate as the nominal policy rate minus the Central Bank's inflation forecast one year ahead. Diagram 10 shows monetary policy stance over time in nominal terms (red line) and in real terms (blue line). The diagram shows that the two measures follow each other well (correlation is 0.82), but that there are certain differences. One year that stands out is 2022 when the nominal deviation was close to zero while the real was close to four, that is strongly expansionary. Diagram 10. Monetary Policy Stance Over Time in Nominal and Real Terms Percentage points Note. The red line refers to the difference between the long-term nominal neutral rate and the nominal policy rate. The blue line refers to the difference between the long-term real neutral rate (defined as the long-term nominal neutral rate minus the Central Bank's forecast for CPIF inflation one year ahead) and the real policy rate (defined as the nominal policy rate minus the Central Bank's forecast for CPIF inflation one year ahead). Source: Swedish Central Bank. Diagram 11 shows the relationship between monetary policy stance in real terms and the Central Bank's forecast for the GDP gap one year ahead. The relationship is weakly positive when the entire sample period is included, which is illustrated by the blue line. That is to say that monetary policy has been expansionary when resource utilization has been high and vice versa.

Appendix B – Monetary Policy Stance Measured as the Deviation from the Real Neutral Rate 16 The red line shows that the relationship disappears when the high-inflation period is excluded. That is to say that monetary policy stance has been independent of resource utilization. Diagram 11. Monetary Policy Stance in Real Terms and Resource Utilization Percentage points Note. On the x-axis, the Central Bank's forecast for the GDP gap one year ahead is shown. On the y-axis, the real neutral rate minus the real policy rate at the time the GDP gap forecast was made is shown. The dots refer to observations for respective years and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023, and 2024. Source: Swedish Central Bank. Diagram 12 shows the relationship between monetary policy stance in real terms and fiscal policy stance. The relationship is weakly positive, that is to say that fiscal and monetary policy have on average been expansionary or contractionary at the same time. The relationship is weaker than when we use the nominal measure of monetary policy stance. In summary, we find that fiscal and monetary policy have pulled in the same direction even if we use a real measure of monetary policy stance. Measures of monetary policy stance risk becoming misleading when large changes occur, for example that inflation rises rapidly because it is relatively common to assume that central banks want to smooth interest rate changes over time.

Appendix B – Monetary Policy Stance Measured as the Deviation from the Real Neutral Rate 17 Diagram 12. Stabilization Policy Stance Percentage points Note. On the x-axis, the real neutral rate minus the real policy rate at the time the decision was made is shown. On the y-axis, the surplus target minus the government's forecast for the structural saving one year ahead is shown. The dots refer to observations for respective years and the blue line refers to the estimated regression line. The red line refers to the estimated regression line excluding the red-marked years 2022, 2023, and 2024. Sources: Ministry of Finance and the Central Bank.

SWEDISH CENTRAL BANK Tel 08 - 787 00 00 registratorn@riksbank.se www.riksbank.se PRODUCTION SWEDISH CENTRAL BANK

Footnotes

1. Economic commentaries are short analyses about relevant issues for the Riksbank. They can be authored by both individual Executive Board members and employees at the Riksbank. Employees' commentaries are approved by the department head while the Executive Board members themselves are responsible for the content in their commentaries. ↩

2. The authors wish to thank Hugo Sparrman for help with charts and employees at the Riksbank for valuable comments at a seminar. ↩

3. See Walentin (2023) for the theoretical arguments for that fiscal and monetary policy should pull in the same direction and what it means for stabilization policy in Sweden. See also Bergholt et al. (2025) for an alternative theory about that fiscal and monetary policy should pull in different directions during inflation and exchange rate shocks. ↩

4. Previous studies that have examined the stance of stabilization policy in Sweden during the last decades find that fiscal and monetary policy generally have pulled in the same direction. See for example Calmfors et al. (2022) and Swedish Fiscal Policy Council (2023). ↩

5. In the assessment of fiscal policy, we have started from the forecasts in the Budget Bills and the surplus target that applied at the time. To make the amount of information as comparable as possible, we have in the assessment of monetary policy started from the forecasts made at the monetary policy meeting that was closest to the publication of the budget bill. An exception is 2008 when the forecasts changed significantly after Lehman Brothers went bankrupt, where we have started from the monetary policy report that was published in October. ↩

6. In this study, we disregard complementary monetary policy measures such as for example purchases and sales of securities. ↩

7. See for example Flodberg (2024), Lundvall et al. (2025) and Seim (2024). ↩

8. The interpolation corresponds relatively well with the assessments made in connection with the publications of the updates. 2019 and 2022 it was for example stated that the long-term level of the interest rate probably was in the lower part of the interval, or below. This strengthens the reasonableness of our measure of the neutral interest rate because the blue line in Chart 1 lies closer to the lower limit in the interval. ↩

9. Calmfors et al. (2022) find for example that the relationship is only significantly different from 0 when one starts from ex-ante estimates. ↩

10. In Appendix A is presented how the financial saving, which also includes the automatic stabilizers, co-varies with the business cycle, inflation deviations and monetary policy. The relationship with the business cycle and inflation deviations looks as expected stronger with this measure, while the relationship with monetary policy looks similar. ↩

11. Fiscal policy is affected by targets within the fiscal policy framework such as the balance target for municipalities and regions and the target for the public sector's debt level (the debt anchor). We are also aware that not all fiscal policy measures are captured in our measure (a recent example is the electricity price support that affected the economy, but had no effects on the budget balance). ↩

12. In times of high inflation, a common recommendation is that fiscal policy should prioritize mitigating the effects of the high inflation for the most economically vulnerable and, if possible, take measures that relatively quickly improve the economy's supply side. ↩

13. Examples of such research are Czarnota and Stockhammar (2026) who estimate the inflation effects of individual fiscal policy measures, so-called inflation multipliers, with Swedish data. ↩