Monetary and fiscal policies in the euro area : independent but nevertheless connected

Before the onset of the financial and economic crisis in 2007, one seemed to know a good recipe for effective macroeconomic stabilisation. In a nutshell, an independent central bank with its interest rate instrument guarantees price stability and the fiscal authority, in order not to interfere, ensures that public finances are healthy. The crisis, however, challenged the standard policy framework, as the latter did not foresee the many interactions between monetary and fiscal policy that emerged during the crisis. This article discusses some of these interactions in the euro area and thus promotes better insight into the complex links between the two policy domains.