Forward Guidance
Dr. Claudio Borio & Joseph Wang on Fiscal Dominance, Financial Instability, and the Boundaries Of Debt-Fueled Economic Growth
Oct 20, 2023
Renowned economist Dr. Claudio Borio and Joseph Wang discuss the interplay of monetary and fiscal policy, risks of high debt, self-reinforcing credit expansion, high vs low inflation regimes, correlation between money and inflation, and the impact of interest rate risk on the banking system and economy.
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Quick takeaways
- Monetary policy and fiscal policy are tightly linked, with each supporting and backing up the other.
- Central bank independence is effective in maintaining low inflation, but becomes challenged in situations of unsustainable fiscal positions.
Deep dives
The Link between Monetary and Fiscal Policy
Monetary and fiscal policy are tightly linked as they are the two key policy levers of the state. They back each other up, with monetary policy avoiding government default and fiscal policy providing the resources to back monetary policy. The balance sheets of the government and central bank are also linked. The degree of independence of monetary policy has varied over time, with globalization and political developments playing a role. Globalization and central bank independence stem from similar political beliefs in open markets and limited government.
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