Low interest rates, monetary policy and the close links with fiscal policy

Enrique Alberola

Chapter 4 in Fiscal Policy in a Turbulent Era, 2024, pp 58-72 from Edward Elgar Publishing

Abstract: The decline in interest rate has reshaped fiscal and monetary policies in the last decades. The Great Financial Crisis (GFC) transformed the monetary policy frameworks, when central banks adopted unconventional policies with a strong fiscal content. The nexus between monetary and fiscal policies strengthened and their complementarity allowed them to overcome the GFC and the pandemic crisis. Monetary and fiscal policies will continue to be closely interconnected, but the risks derived from too close links advised for a progressive separation of both policies even before the reawakening of inflation. With inflation, the room for tensions between both policies and the stakes are higher. The continuity of low interest rates beyond the current episode hinges on the taming of inflation. If it is achieved, complementarity in separate roles will be manageable; otherwise, the intertwining of policies may weaken both and macroeconomy stability as a whole.

Keywords: Economics and Finance; Politics and Public Policy (search for similar items in EconPapers)
Date: 2024
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