Fiscal Dominance: Implications for Bond Markets and Central Banking

Barthélemy, Jean, Eric Mengus and Guillaume Plantin

No 19591, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Fiscal dominance refers to situations in which fiscal policy imposes restrictions on monetary policy. Large shifts in the dynamics of sovereign debts, surpluses, and central bank's balance sheets since the Great Financial Crisis have created the perception of a heightened risk of such fiscal dominance in major jurisdictions. This paper reviews the theoretical and empirical literature on fiscal dominance. We offer a simple theory in which fiscal dominance arises as the outcome of strategic interactions between the government, the central bank and the bond markets.

Date: 2024-10
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