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Threat of fiscal dominance?

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  • Bank for International Settlements

Abstract

The massive expansion of central bank balance sheets to contain the worst financial crisis in living memory raises questions about the theory and practice of monetary policy. The persistence in many advanced countries of large fiscal deficits and the prospect of high public debt/GDP ratios for many years is likely, at some point, to create policy dilemmas not only for central banks but also for public debt managers. Some countries have already had to cope with higher sovereign risk. Worries about both "fiscal dominance" and "financial repression" have certainly gained ground. Whatever view is taken of this, the boundary between monetary policy and government debt management has become increasingly blurred. Policy interactions have changed in ways that are difficult to understand. The current delineation of policy mandates may need to be reassessed. The aim of this BIS-OECD workshop was to better understand these issues. Theoretical perspectives draw on a long and rich body of monetary theory, but the theory is far from settled. Analysis of the history of fiscal/debt/monetary policy interconnections shows how such linkages have varied across countries and over time - there is no "one size fits all". And careful review of empirical studies shows that precise estimates of the impact of large-scale central bank purchases of government bonds need to be treated with caution. There is great uncertainty about the impact of increased government debt on inflation, on interest rates and on future growth. Much will depend on future policies. Do monetary policies need to be better coordinated with other macroeconomic or financial policies? Could government financing decisions and financial sector regulation drive the long-term interest rate too low, at least in the short-term? What medium-term risks could this create? What could be the implications for the efficiency and stability of the financial system? The papers and discussions in this volume do not, of course, converge on simple answers to any of these questions. Indeed, opposite views are expressed. The aim rather is to stimulate discussion about the complex interactions between fiscal deficits, government debt management and monetary policy in unusual macroeconomic circumstances. Some of these interactions are new, but many would be very familiar to an earlier generation of central bankers faced with heavy government debts and thin financial markets.

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  • Bank for International Settlements, 2012. "Threat of fiscal dominance?," BIS Papers, Bank for International Settlements, number 65.
  • Handle: RePEc:bis:bisbps:65
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    References listed on IDEAS

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    2. Haldane, Andrew & Roberts-Sklar, Matt & Wieladek, Tomasz & Young, Chris, 2016. "QE: the story so far," CEPR Discussion Papers 11691, C.E.P.R. Discussion Papers.
    3. S. M. Ali Abbas & Ms. Asmaa A ElGanainy & Laura Blattner & Malin Hu & Mark De Broeck, 2014. "Sovereign Debt Composition in Advanced Economies: A Historical Perspective," IMF Working Papers 2014/162, International Monetary Fund.
    4. Allen, Bill & Chan, Ka Kei & Milne, Alistair & Thomas, Steve, 2012. "Basel III: Is the cure worse than the disease?," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 159-166.
    5. van Riet, Ad, 2018. "Modern financial repression in the euro area crisis: making high public debt sustainable?," MPRA Paper 92649, University Library of Munich, Germany.
    6. Jagjit S Chadha & Philip Turner & Fabrizio Zampolli, 2013. "The interest rate effects of government debt maturity," BIS Working Papers 415, Bank for International Settlements.
    7. Dufrénot, Gilles & Jawadi, Fredj & Khayat, Guillaume A., 2018. "A model of fiscal dominance under the “Reinhart Conjecture”," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 332-345.
    8. Philip Turner, 2014. "The exit from non-conventional monetary policy: what challenges?," BIS Working Papers 448, Bank for International Settlements.
    9. Wolswijk, Guido, 2020. "Drivers of European public debt management," Working Paper Series 2437, European Central Bank.
    10. Beetsma, Roel & Giuliodori, Massimo & Hanson, Jesper & de Jong, Frank, 2021. "The maturity of sovereign debt issuance in the euro area," Journal of International Money and Finance, Elsevier, vol. 110(C).
    11. Júlia Brunet & Susana Párraga, 2021. "Fiscal rebalancing plans in the medium term: the case of the United Kingdom," Economic Bulletin, Banco de España, issue 2/2021, pages 1-8.
    12. Olga A. Norkina & Sergey E. Pekarski, 2014. "Optimal Financial Repression," HSE Working papers WP BRP 81/EC/2014, National Research University Higher School of Economics.
    13. van Riet Ad, 2019. "Twenty Years of European Central Bank Monetary Policy: A Keynesian and Austrian Perspective," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 239(5-6), pages 797-840, October.
    14. Boneva, L. & Elliott, D. & Kaminska, I. & Linton, O. & McLaren, N. & Morley, B., 2019. "The Impact of Corporate QE on Liquidity: Evidence from the UK," Cambridge Working Papers in Economics 1937, Faculty of Economics, University of Cambridge.
    15. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation," MPRA Paper 57212, University Library of Munich, Germany.
    16. Norkina, O. & Pekarski, S., 2015. "Nonmarket Debt Placement As Financial Repression," Journal of the New Economic Association, New Economic Association, vol. 28(4), pages 31-55.

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