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Threat of fiscal dominance?

Bank for International Settlements

No 65 in BIS Papers from Bank for International Settlements

Abstract: The massive expansion of central bank balance sheets to contain the worst financial crisis in living memory raises questions about the theory and practice of monetary policy. The persistence in many advanced countries of large fiscal deficits and the prospect of high public debt/GDP ratios for many years is likely, at some point, to create policy dilemmas not only for central banks but also for public debt managers. Some countries have already had to cope with higher sovereign risk. Worries about both "fiscal dominance" and "financial repression" have certainly gained ground. Whatever view is taken of this, the boundary between monetary policy and government debt management has become increasingly blurred. Policy interactions have changed in ways that are difficult to understand. The current delineation of policy mandates may need to be reassessed. The aim of this BIS-OECD workshop was to better understand these issues. Theoretical perspectives draw on a long and rich body of monetary theory, but the theory is far from settled. Analysis of the history of fiscal/debt/monetary policy interconnections shows how such linkages have varied across countries and over time - there is no "one size fits all". And careful review of empirical studies shows that precise estimates of the impact of large-scale central bank purchases of government bonds need to be treated with caution. There is great uncertainty about the impact of increased government debt on inflation, on interest rates and on future growth. Much will depend on future policies. Do monetary policies need to be better coordinated with other macroeconomic or financial policies? Could government financing decisions and financial sector regulation drive the long-term interest rate too low, at least in the short-term? What medium-term risks could this create? What could be the implications for the efficiency and stability of the financial system? The papers and discussions in this volume do not, of course, converge on simple answers to any of these questions. Indeed, opposite views are expressed. The aim rather is to stimulate discussion about the complex interactions between fiscal deficits, government debt management and monetary policy in unusual macroeconomic circumstances. Some of these interactions are new, but many would be very familiar to an earlier generation of central bankers faced with heavy government debts and thin financial markets.

Date: 2012 Written 2012-05
ISBN: 92-9131-135-9
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Chapters in this book:

Threat of fiscal dominance? Workshop summary , pp 1-12 Downloads
Richhild Moessner and Philip Turner
Government debt management and monetary policy in Britain since 1919 , pp 15-50 Downloads
William Allen
Keynes’s monetary theory of interest , pp 51-81 Downloads
Geoff Tily
Thoughts on policies and the policy framework after a financial crisis , pp 83-93 Downloads
Lex Hoogduin and Peter Wierts
Comments , pp 91-93 Downloads
Christophe Chamley
Sovereign debt management as an instrument of monetary policy: an overview , pp 97-118 Downloads
Fabrizio Zampolli
Monetary policy and the natural rate of interest , pp 119-134 Downloads
Matthew Canzoneri, Robert Cumby and Behzad Diba
Comment , pp 135-137 Downloads
Stephen Cecchetti
Is the standard micro portfolio approach to sovereign debt management still appropriate? , pp 141-155 Downloads
Hans Blommestein and Anja Hubig
Sovereign debt management and fiscal vulnerabilities , pp 157-176 Downloads
Alessandro Missale
Debt management and optimal fiscal policy with long bonds , pp 177-212 Downloads
Elisa Faraglia, Albert Marcet and Andrew Scott
Interactions between sovereign debt management and monetary policy under fiscal dominance and financial instability , pp 213-237 Downloads
Hans Blommestein and Philip Turner
Comment , pp 239-241 Downloads
Richhild Moessner
The effectiveness of the Federal Reserve's Maturity Extension Program - Operation Twist 2: the portfolio rebalancing channel and public debt management , pp 245-255 Downloads
Torsten Ehlers
The financial crisis and the changing dynamics of the yield curve , pp 257-276 Downloads
Morten Bech and Yvan Lengwiler
The financial market impact of UK quantitative easing , pp 277-304 Downloads
Francis Breedon, Jagjit Chadha and Alex Waters

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