The topic of coordination between monetary and fiscal policy has become the focus of policy discussion in recent years (Draghi 2014, Lagarde 2020, Schnabel 2021). One reason is that there is limited space for traditional monetary policy based on steering the short-term interest rate when the latter is at (or close to) the effective lower bound (ELB). Many recent papers have advocated mechanisms to implement a coherent a monetary-fiscal policy mix (see, for example, the policy report by Barsch et al. 2021).
Empirically, there is limited knowledge about how the combination of monetary and fiscal policy affects inflation. This is a complex topic since there are multiple channels of interaction. Monetary policy, by affecting interest rates, output, and inflation, has an impact on the government’s budget constraint. The response of fiscal authorities via the adjustment of the primary deficit depends on the fiscal framework or the stabilisation objectives of fiscal authorities. The effe
Marco Buti, George Papaconstantinou 23 April 2021
Most of the discussion on the economic policy response to the pandemic in Europe has centred on its ambition, tools, and institutional characteristics. Less discussion has taken place on the factors shaping EU integration and economic policy priorities after the pandemic. In a new CEPR Policy Insight, the authors argue that four sets of issues will be important in shaping the legacy of the pandemic for European integration: redefining the new boundaries between state and market; revisiting the nature of subsidiarity; reconnecting the EU domestic with the global agenda; and learning to respond to longer term structural shifts.
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Arnoud Boot, Elena Carletti, Hans‐Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Marti Subrahmanyam
In the early stages of the Covid-19 crisis, concerns emerged over potential divergence in the euro area (e.g. Boot et al. 2020). These concerns were valid given the unprecedented scale and asymmetric impact of the shock. These concerns were also aggravated by the initial situation of the euro area, with potentially destabilising imbalances between ‘core’ and ‘periphery’ countries.
Calls for coordinated responses – in particular on the fiscal front – appeared quickly (Baldwin and Weder di Mauro 2020). The ECB acted fast in order to provide fiscal space (Bartsch et al. 2020a) by keeping borrowing costs low and by effectively providing a monetary backstop to government debt. The same authors also noted that “correcting current imbalances between investment and saving, could set in a virtuous circle of stronger growth and reduced indebtedness” (Bartsch et al. 2020