Fabio Panetta: Monetary-fiscal interactions on the way out of the crisis

Keynote speech by Mr Fabio Panetta, Member of the Executive Board of the European Central Bank, at the Conference of the Governors of Mediterranean Central Banks on "Central banks at the frontline of the COVID-19 crisis: weathering the storm, spurring the recovery" Frankfurt am Main, 28 June 2021.

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

The pandemic has seen a paradigm shift. For the first time in decades, monetary and fiscal policies across advanced economies are working together to stimulate demand. And following many years of low growth and low inflation, both are now picking up.

The key question is whether this moment will last.

Some view close monetary-fiscal interactions as an exceptional response to the pandemic emergency that should end when the pandemic does. But the experience we have gained since the great financial crisis shows that situations in which monetary and fiscal policies should work together are not exceptional. These situations can arise more frequently than we previously thought, especially in an environment of structurally low interest rates.

In fact, the current phase of monetary-fiscal cooperation in various parts of the globe is giving us an opportunity to escape from the persistent "liquidity trap" that is affecting advanced economies – a situation characterised by weak inflation and nominal interest rates in the neighbourhood of their lower bound, but insufficiently low to stimulate aggregate demand.