Monetary and fiscal policy: safeguarding stability and trust

Monetary and fiscal policy are inextricably intertwined. The notion of the "region of stability" sheds light on their long-term challenges. The region maps constellations of the two policies that foster sustainable macroeconomic and financial stability and that keep tensions between the policies manageable. Even before the Covid crisis struck, the two policies had been approaching the boundaries of the region. Hence the recent unique combination of high inflation and widespread financial vulnerabilities. Looking ahead, longer-term government debt trajectories pose the biggest threat. They have been relentlessly narrowing the region of stability and will continue to do so. Operating firmly within the region calls for adjustments to strategies, institutions and, above all, mindsets. Their objective is to dispel a kind of "growth illusion" – a de facto excessive reliance on monetary and fiscal policy to drive growth.