## Fiscal R-Star: Fiscal-Monetary Tensions and Implications for Policy

_IMF Working Papers, August 9, 2024_

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## Bibliographic details
- Authors: Marijn A. Bolhuis, Jakree Koosakul, Neil Shenai
- Published: August 9, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400282126.001

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### Overview
- Since the Global Financial Crisis, fiscal policy in advanced economies has become more “active” — increasingly unresponsive to rising debt levels.
- The paper introduces “fiscal r-star,” defined as the real interest rate required to stabilize debt levels when:
  - the primary balance is set exogenously,
  - output is growing at potential, and
  - inflation is at target.
- The difference between monetary r-star and fiscal r-star is termed the “fiscal monetary gap” and is proposed as a proxy for fiscal-monetary policy tensions.
- Current estimates indicate that fiscal-monetary tensions are at historic highs.
- Given a tepid growth outlook, the paper suggests growth-enhancing reforms and fiscal consolidation, among other policy adjustments, may be needed to attenuate fiscal-monetary tensions over time.

### Fiscal r-star Concept and Fiscal-Monetary Gap
- Fiscal r-star: the real interest rate required to stabilize debt under specified assumptions (exogenous primary balance, output at potential, inflation at target).
- Fiscal monetary gap: monetary r-star minus fiscal r-star; interpreted as a proxy for fiscal-monetary policy tensions.

### Empirical Findings (Data and Associations)
- Data: analysis covers over 140 years of data from 16 advanced economies.
- Associations found with larger fiscal-monetary gaps:
  - rising debt levels,
  - higher inflation,
  - financial repression,
  - lower real returns on bonds and cash,
  - elevated risks of future debt crises,
  - elevated risks of future inflation crises,
  - elevated risks of future currency crises,
  - elevated risks of future housing crises,
  - elevated risks of future systemic crises.

### Policy Implications and Recommendations
- To attenuate fiscal-monetary tensions over time, the paper highlights potential adjustments including:
  - growth-enhancing reforms,
  - fiscal consolidation,
  - other policy adjustments appropriate to the context of active fiscal policy and elevated fiscal-monetary gaps.

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_Source: https://www.imf.org/en/publications/wp/issues/2024/08/09/fiscal-r-star-fiscal-monetary-tensions-and-implications-for-policy-552877_