The interaction between monetary and fiscal policies has long been a fundamental topic in macroeconomics. Each of these instruments can, on its own, affect macroeconomic stability and social welfare. Still, their true effectiveness depends on the way they are combined and the degree of coordination between them.

In Iran, structural challenges such as inflation volatility, chronic budget deficits, and the accumulation of public debt have made rethinking the interaction between monetary and fiscal policies increasingly imperative. Depending on economic conditions, monetary policy can adopt a supportive or confrontational stance toward fiscal policy, and constructive interaction between the two enhances policy effectiveness and strengthens public confidence. Conversely, a lack of coordination often undermines credibility, diminishes the effectiveness of policy tools, and threatens long-term economic stability.

This study addresses the key question of which combination of monetary and fiscal policies can ensure economic stability and financial sustainability in Iran with minimal welfare loss. It further evaluates the extent to which one-dimensional approaches—whether based solely on fiscal discipline or exclusively on anti-inflationary measures—can mitigate macroeconomic instability. The overarching objective is to identify the optimal policy mix that minimizes welfare costs while providing a coherent framework for the joint management of inflation and public debt.