Fiscal policy, public debt and central banks

This event is part of the virtual 20th Annual Conference webinars and panel discussions that were livestreamed on our website from 23 to 28 June.


In his webinar, Professor Velasco presented "Joined at the hip: monetary and fiscal policy in a liquidity-driven world", a paper co-authored with Guillermo Calvo (Columbia University).

In an environment of ultra-low interest rates, government bonds become money-like, and money becomes bond-like. But one key difference remains: the way their prices are set. Because money is the unit of account, the price of money is the inverse of the price level. If prices are sticky, so is the price of money in terms of goods. By contrast, the price of bonds is free to jump all over the place – and often does, even in the case of bonds as safe and liquid as US Treasuries. Mr Velasco and his co-authors explore the macroeconomic consequences of this asymmetry in an environment in which both money and bonds provide liquidity services. They find that certain fiscal policies (like an unanticipated and once-and-for-all helicopter drop of bonds) have no real effects. Others (for instance, an anticipated helicopter drop of bonds) cause a drop in bond prices, which in turn reduces liquidity, aggregate demand and output. These fiscal policies are expansionary if and only if they are complemented by monetary policies that stabilise liquidity provision. In that sense, monetary and fiscal policies are joined at the hip.

About the speaker

Andrés Velasco
Dean of the School of Public Policy, London School of Economics and Political Science

Professor Velasco is the author of nearly 100 academic articles, several academic books and two novels. In 2006, he received the Award for Excellence in Research from the Inter-American Development Bank. He has also served as a consultant to the International Monetary Fund, the World Bank, the Inter-American Development Bank, as well as to governments, central banks and private businesses around the world.

Mr Velasco has been the member of the G20 Eminent Persons Group and the Global Oceans Commission, and has co-chaired the Global Panel on the Future of the Multilateral Lending Institutions. He has also been the Minister of Finance and a presidential candidate in Chile. During his tenure he was recognised as Latin American Finance Minister of the Year by several international publications. His work to save Chile´s copper windfall and create a rainy-day fund was highlighted in The Financial Times, The Economist, The Wall Street Journal and Bloomberg, among many others.

About the discussant

Cristina Arellano
Assistant Director, Policy and Monetary Advisor, Federal Reserve Bank of Minneapolis

Cristina Arellano has been with the Federal Reserve Bank of Minneapolis since 2009. She has also been an assistant professor in the Department of Economics at the University of Minnesota (2004–09). Cristina received her BS in economics from Indiana University in 1999 and earned a PhD in economics in 2004 from Duke University. Since 2009, she has also served as a faculty research fellow at the National Bureau of Economic Research. Her research focuses on international macroeconomics, sovereign debt and financial crises.

Cristina's work has appeared in the American Economic Review, the Journal of Political Economy, the Journal of Monetary Economics, the Journal of Economic Theory, and the Journal of Development Economics.