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The Doug Purvis Memorial Lecture - Monetary/Fiscal Policy Mix and Financial Stability: The Medium Term Is Still the Message

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  • Stephen S. Poloz

Abstract

Financial stability risks have become topical in the wake of the global financial crisis and the subsequent extended period of very low interest rates. This paper investigates the significance of the mix of monetary and fiscal policies for financial stability through counterfactual simulations of three key historical episodes, using the Bank's main policy model, ToTEM (Terms-of-Trade Economic Model). The paper finds that there is an intimate relationship between the monetary/fiscal policy mix and the dynamics of both private sector and public sector debt accumulation. No attempt is made to develop criteria for policy mix optimization, since it is clear from the model simulations that the appropriate policy mix is highly state-dependent. This finding points to the need for a coherent framework for weighing the relative financial and macroeconomic consequences of accumulating public sector versus private sector debt. Furthermore, the analysis suggests that there are potential benefits to ex ante monetary/fiscal policy coordination, and that Canada's policy framework - where the monetary and fiscal authorities jointly agree on an inflation target while enshrining central bank operational independence - represents an elegant coordinating mechanism.

Suggested Citation

  • Stephen S. Poloz, 2016. "The Doug Purvis Memorial Lecture - Monetary/Fiscal Policy Mix and Financial Stability: The Medium Term Is Still the Message," Canadian Public Policy, University of Toronto Press, vol. 42(3), pages 225-236, September.
    • Handle: RePEc:cpp:issued:v:42:y:2016:i:3:p:225-236
    DOI: 10.3138/cpp.2016-013EN
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    Cited by:

    1. Xi Wang & Jiayang Li & Guangbin Zhang, 2022. "Mixed Monetary–Fiscal Policies and Macroeconomic Fluctuations: An Analysis Based on the Dynamic Stochastic General Equilibrium Model," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 30(2), pages 167-196, March.
    2. Thomas J Carter & Rhys Mendes & Lawrence L Schembri, 2018. "Credibility, Flexibility and Renewal: The Evolution of Inflation Targeting in Canada," RBA Annual Conference Volume (Discontinued), in: John Simon & Maxwell Sutton (ed.),Central Bank Frameworks: Evolution or Revolution?, Reserve Bank of Australia.
    3. Foglia, Matteo & Palomba, Giulio & Tedeschi, Marco, 2023. "Disentangling the geopolitical risk and its effects on commodities. Evidence from a panel of G8 countries," Resources Policy, Elsevier, vol. 85(PB).

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