determined by sequential decisionmaking, subject to an understanding of the structure of the economy and of the likely responses of the other policymakers to one ’ s policy actions. in my view, the process works as follows. the administration and the congress together make decisions that determine the fiscal part of the policy mix. over the last 20 years, these decisions generally have been based on considerations that have more to do with long - run objectives such as promotion of higher longer - term growth, than with short - run stabilization. making these decisions takes considerable time because of the dynamics of the annual budget process and the legislative process. the current year ’ s decisions are incorporated and the following years ’ decisions are anticipated in the fiscal policy assumptions underlying the federal reserve ’ s forecast, extending out a year or two. the federal reserve then sets its policy to achieve the broad objectives assigned to it, specifically, price stability and full employment. fiscal decisions are, in turn, affected by budget forecasts that are partly contingent on monetary policy assumptions. in effect, fiscal policymakers make the fundamental decision about the policy mix. monetary policymakers smooth the transition to the new equilibrium, by minimizing the effect on output relative to full employment and on prices. because monetary policy adjusts continuously to changes in the economy, including those resulting from fiscal policy, it makes sense to think that fiscal policy decisions are made first and monetary policy decisions are conditional on the fiscal decisions. so does this mean that monetary policy responds directly to fiscal policy actions? i believe it is more accurate to say that the fed ’ s response is indirect. that is, monetary policy responds to changes in fiscal policy in much the same way that it responds to other influences on the economy, such as equity prices, exchange rates, or the demand for us exports due to changed growth prospects abroad. each and all of these developments affect both the macroeconomic developments and the forecast that drive adjustments in monetary policy in pursuit of full employment and price stability. it is also important not to overstate the role monetary policy plays in shaping the policy mix. indeed, the fiscal policy decision uniquely determines the policy mix. in terms of our diagram, the game is fundamentally over when the fiscal decision pins down the intersection of the is curve and the vertical line at full employment. the only question remaining is how the lm curve will come to intersect at the same point. one possibility, of course, is that the federal reserve adjusts its open market operations to move the interest rate to this

##es. the imf staff has taken these developments into account in the april 2017 world economic outlook ( weo ) and forecasts that world gdp growth will be noticeably higher over the next two years than in 2016 — a slight upward revision relative to the october 2016 weo. 5 there may well even be some chance that foreign economies kick into gear enough that u. s. and foreign business conditions become reasonably well aligned, as occurred during the u. s. monetary tightening cycles that began in 1999 and in 2004. in both of those episodes, u. s. exports grew substantially against the backdrop of a brisk expansion in foreign activity and a stable or even slightly depreciating dollar. of course, it is hard to predict whether foreign economies continue to strengthen so that the global economy will move more in sync — as i hope — or if a substantial gap will remain between the business cycle positions of the united states and our foreign trading partners. however, even if monetary policy divergence remains substantial, there is good reason to think that spillovers to foreign economies will be manageable. first, i expect that the fed ’ s removal of accommodation will be driven by a continued expansion of the u. s. economy ; thus, foreign economies are likely to benefit from the developments that induce the fomc to tighten. second, most foreign central banks should be able to mitigate an undesirable tightening of their own financial conditions through appropriate policy actions. an important lesson of the taper tantrum was that effective communication and actions by major central banks, including the european central bank and the bank of england, were helpful in quickly pushing bond yields down to levels that these central banks regarded as appropriate to their economic situation. third, many emes have markedly improved fundamentals — including smaller current account deficits and more anchored inflation expectations — that should allow them to better withstand the effects of u. s. tightening, though some vulnerabilities remain. finally, i expect that u. s. policy normalization will be gradual under likely scenarios for the evolution of output and inflation. a gradual and ongoing removal of accommodation seems likely both to maximize the prospects of a continued expansion in the u. s. economy and to mitigate the risk of undesirable spillovers abroad. references ammer, john, michiel de pooter, christopher erceg, and steven kamin ( 2016 ). “ international spillovers of monetary policy, ” ifdp notes. washington :