Monetary policy and public debt

C. Goodhart

Financial Stability Review, 2012, issue 16, 123-130

Abstract: When the public sector of a country becomes so indebted that its fi scal sustainability is potentially at risk, then monetary policy has to be, perforce, closely integrated with debt management and fiscal policy. This was the case in the United Kingdom in the decades after World War II. By the 1980s, however, debt ratios had fallen and fi scal policies were sufficiently controlled to allow for a separation principle to be adopted whereby each policy mechanism, i.e. setting interest rates, debt management, fiscal (budgetary) policy were separately and independently run according to their own set of individual objectives. As fiscal policies have recently been compromised, and debt ratios become much enlarged, that separation principle is becoming subject to increasing stress. We are reverting to the more complex conditions which faced the Bank of England after each of the World Wars.

Date: 2012
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