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The political economy of monetary-fiscal coordination: central bank losses and the specter of central bankruptcy in Europe and Japan

In this paper, Sebastian Diessner sheds light on how better monetary-fiscal coordination (as a solution to an array of macroeconomic policy problems) can be expected to play out across very different political-economic contexts.

Sebastian Diessner
09 November 2023
Read the full paper here

Central banks and finance ministries have been faced with growing calls for better monetary-fiscal coordination in recent years as the solution to an array of macroeconomic policy problems, promoted by an ever-wider range of stakeholders. Yet, how can the silver-bullet solution of coordination be expected to play out across very different political-economic contexts? This paper sheds light on this question by introducing a novel typology of monetary-fiscal coordination that can help make sense of formal and informal coordination efforts in the post-2008 era.

That the political economy of central banking has been subject to tremendous change in recent years is an understatement. The pandemic-induced economic shock and the resulting financial disruptions brought about yet another round of balance sheet expansion by central banks at an even steeper pace, and this time not only in high-income but also in middle-income countries. This might lead to conclude that central banks across the globe have faced little to no constraints on their monetary operations after all, including from the specter of losses and the desire for additional fiscal backing. A look beneath the surface reveals a more nuanced picture, however.


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