Monetary and fiscal policies at a crossroads - new normal or new path?

In panel remarks, Claudio Borio discusses the nexus between monetary and fiscal policy. The two policies should normalise over time as conditions allow to re-establish safety margins, and then to remain within a "corridor of stability".

The nexus between monetary and fiscal policy has again risen to prominence post-Great Financial Crisis and since the pandemic began. The two policies will face serious challenges in the medium to long term given the historically unprecedented initial conditions – the lowest interest rates and highest debt-to-GDP ratios on record. It is essential for the two policies to normalise over the medium term as conditions allow, to re-establish precious safety margins, and then to remain within a "corridor of stability". Hazards loom large along the way, as normalisation is a joint task: the two policies will tendentially be working at cross purposes, putting pressure on each other. Reaffirming clear boundaries between the two policies will facilitate the task. Ultimately, however, the only option to effectively limit the risks is to raise long-term growth, through appropriate structural reforms supported by growth-friendly fiscal policies. This amounts to abandoning the so-called "New Normal" and taking a New Path.