Jens Weidmann: Too close for comfort? The relationship between monetary and fiscal policy

Speech by Dr Jens Weidmann, President of the Deutsche Bundesbank and Chair of the Board of Directors of the Bank for International Settlements, at the OMFIF Virtual Panel, London, 5 November 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

1 Introduction

David Marsh

Ladies and gentlemen,

Thank you very much for inviting me. It is a great pleasure to join you today. I would have been only too happy to come to London. The pandemic thwarted our plans. But luckily, events such as this can be shifted to the virtual sphere.

In spring, many things that enrich our daily lives were no longer able to take place. Concert halls, museums, restaurants, cafés and gyms had to close. Cinemas have also been hit hard. One film release after the other has been postponed. Even one of London's most famous residents, James Bond, had to give way.

Then, over the summer, large parts of the economy rebounded. And a new blockbuster found its way into the multiplexes, Christopher Nolan's world-spanning thriller "Tenet". The film's plot centres around the idea that the flow of time can be inverted, which allows objects and people to move backwards through time. Actions running forwards and those going backwards collide in the here and now. As you might imagine, that brings a great deal of confusion into the protagonists' plans.

However, from an economist's point of view, there is already enough potential for trouble even with time flowing in only one direction. In both monetary and fiscal policy, there are incentives for policymakers to announce a certain course of action today and deviate from it tomorrow. For example, the government could announce to seek price stability, but then trade it off for lower unemployment in the short run by creating surprise inflation.