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Dealing with the next downturn: From unconventional monetary policy to unprecedented policy coordination

Author(s): Elga Bartsch, Jean Boivin, Stanley Fischer, and Philipp Hildebrand

Date published: Oct 2019

SUERF Policy Note, Issue No 105

by Elga Bartsch, Jean Boivin, Stanley Fischer, and Philipp Hildebrand
Key contributor: Simon Wan
BlackRock Investment Institute


JEL-codes: E44, E58, H60.
Keywords: Central banks, Federal Reserve, ECB, monetary policy, fiscal policy, interest rates, inflation, Phillips curve, going direct.

Unprecedented policies will be needed to respond to the next economic downturn. Monetary policy is almost exhausted as global interest rates plunge towards zero or below. Fiscal policy on its own will struggle to provide major stimulus in a timely fashion given high debt levels and the typical lags with implementation. Without a clear framework in place, policymakers will inevitably find themselves blurring the boundaries between fiscal and monetary policies. This threatens the hard-won credibility of policy institutions and could open the door to uncontrolled fiscal spending. This paper outlines the contours of a framework to mitigate this risk so as to enable an unprecedented coordination through a monetary-financed fiscal facility. Activated, funded and closed by the central bank to achieve an explicit inflation objective, the facility would be deployed by the fiscal authority.

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SUERF Policy Note, Issue No 105SUERF Policy Note, Issue No 105

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