## The Interaction of Fiscal and Monetary Policy

## Source details

**Canonical URL:** [The Interaction of Fiscal and Monetary Policy](https://www.imf.org/-/media/files/news/speech/2021/jackson-hole-symposium-presentation-2021.pdf)

## Other formats

- [Markdown version](/-/media/files/news/speech/2021/jackson-hole-symposium-presentation-2021.pdf.md)
- [Structured JSON version](/-/media/files/news/speech/2021/jackson-hole-symposium-presentation-2021.pdf.json)

---

### Macroeconomic context and joint support
- Unprecedented joint monetary-fiscal support in response to the pandemic helped limit output losses but triggered inflation and debt concerns.
- Record low policy rates: “Low” policy rates means in the bottom 10th percentile of the country’s distribution of policy rates, since 2004.
- Fiscal support comparisons: Fiscal support measured as percent of 2008-10 and 2020 GDP respectively (GFC vs COVID-19).
- Sovereign asset purchases: Includes purchases through primary and secondary market. EMs use 2020 data.
- Consumer price inflation: median percent year-on-year comparisons for CPI AEs and CPI EMs, and core CPI measures, referenced as of Feb 2020 and Jun-21.

### Distributional and supply-side pressures
- Pent-up demand and excess household savings: Fiscal support includes above-the-line fiscal measures between January 2020 and March 17, 2021. Cumulative excess savings are household savings between 2020Q1 and 2021Q1 in excess of that expected from a linear trend.
- Supply chain disruptions: Supply Chain Disruptions are calculated as the difference between the supply delivery times sub-index in the PMI and a counterfactual, cyclical measure of supply delivery times based on the manufacturing output sub-index in the PMI.
- Beveridge Curve shifts: Job vacancy rate and unemployment rate patterns show shifts between pre-pandemic and pandemic periods (Latest: 2021Q1).

### Monetary policy effectiveness, ZLB, and central bank independence
- In the ZLB period money growth has had little impact on inflation; central bank independence plays a crucial role.
- Inflation response to a 10 percent increase in the monetary base is analyzed over years after monetary base increase.
- No evidence of Unconventional Monetary Policy impact on long-run inflation expectations during Covid: long-run inflation expectations are 6-10 years ahead. Mean increase is not statistically significant.
- Evolution of 2020 inflation forecasts around UMP announcements shows comparisons before and after announcements.

### Financial market risks and complacency
- Uncharted recoveries could trigger surprises and financial market complacency leaves little room for surprises.
- Retail investment patterns in stock markets (survey responses) show variation by income levels and age groups for U.S. 2021 stimulus checks by retail online brokerage accounts.
- Corporate bond spreads: spreads between high yield and investment grade corporate bond index tracked over Jan-20 to Jul-21 for US High Yield and Europe High Yield.
- Cumulative real housing price change over the past 18 months (as of 2021q1) highlighted large cross-country heterogeneity.

### Cross-border spillovers and downside risks
- Adverse monetary policy spillovers could exacerbate diverging recoveries.
- Impact of US monetary surprises and positive news on EMs measured in basis points; portfolio flows impact assessed in basis points of annual GDP.
- Downside risk scenario: New infection wave in EMs + faster MP normalization in AEs produces percent deviations from baseline for World, AEs, and EMs across 2020–2025.

### Structural drivers and real rates
- Challenges remain as structural drivers expected to keep real rates low.
- Natural rate of interest (r*) estimates presented for US, Euro Area, Japan; medium-term real potential GDP per capita growth forecasts compared (Jan 2020 WEO vs July 2021 WEO).

### Key findings (slide-summary points)
- Monetary and fiscal support are both essential for macroeconomic stabilization and financial stability.
- Fiscal policy particularly beneficial if at the effective lower bound for policy rates.
- Monetary policy can help smooth market functioning and prevent self-fulfilling crises.
- QE was effective in reducing government bond yields during initial period of scarce liquidity. Unclear effects on term premium, output and inflation in subsequent months.
- Central bank independence has served countries well.
- Central bank actions (policy rates, APP) should be guided by monetary policy objectives.
- Asset purchases (and sales) must be clearly communicated as serving central banks’ price and financial stability objectives to allay concerns about fiscal dominance. APPs must be done at market prices (favoring secondary market transactions).
- Central bank independence may be vulnerable when central bank balance sheets are heavily exposed to interest rate risk, credit risk, exchange rate risk.
- The taboo against direct government financing by central banks has served countries well.
- Limited experimentation in exceptional circumstances has not had adverse effects.

### Policy conclusions and recommendations
- Sound and clear communication needed to anchor inflation expectations and avoid tantrums.
- Inflation anchoring depends on beliefs about the characteristics and preferences of policy makers.
- Policymakers need to chart contingent actions, announce clear triggers, and act in line with the communication.
- Fiscal policy must be sustainable with credible medium-term fiscal frameworks.
- Emerging market economies with lower fiscal vulnerability are more insulated from external financial shocks than others.
- Countries with the most constrained fiscal position had a smaller likelihood of an APP.
- Comprehensive macroprudential regulations needed, including across banks and nonbanks (NBFI), and across borders, and with new technologies to contain future damage from excessive risk taking and regulatory arbitrage.
- Structural reforms and fiscal policies needed to raise growth potential and r*:
  - Infrastructure, climate, digital, health, education, investment

*International Monetary Fund, Aug 26, 2021 — Gita Gopinath, Jackson Hole Symposium presentation*

---


_Source: https://www.imf.org/-/media/files/news/speech/2021/jackson-hole-symposium-presentation-2021.pdf_