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Fiscal-monetary crosswinds in the euro area | VOX, CEPR Policy Portal


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. Th ....

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Unconventional fiscal and monetary policy at the zero lower bound


Unconventional fiscal and monetary policy at the zero lower bound
Keynote speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Third Annual Conference organised by the European Fiscal Board on “High Debt, Low Rates and Tail Events: Rules-Based Fiscal Frameworks under Stress”
Frankfurt am Main, 26 February 2021
One of the greatest conundrums and policy challenges of our times is the coincidence of persistently low real long-term interest rates and low inflation.
Even before the coronavirus (COVID-19) pandemic, inflation across many advanced economies had been falling short of central banks’ aims for nearly a decade. In the euro area, hopes that inflation would sustainably recover to levels closer to 2% have been repeatedly and persistently disappointed, despite highly favourable financing conditions. ....

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