NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Renato Faccini

Danmarks Nationalbank
Research department
Havnegade 5
1093 Copenhagen
Denmark

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliations: Queen Mary University and Queen Mary University of London and Centre for Macroeconomics

NBER Working Papers and Publications

May 2020Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength
with Francesco Bianchi, Leonardo Melosi: w27112
The COVID pandemic found policymakers facing constraints on their ability to react to an exceptionally large negative shock. The current low interest rate environment limits the tools the central bank can use to stabilize the economy, while the large public debt curtails the efficacy of fiscal interventions by inducing expectations of costly fiscal adjustments. Against this background, we study the implications of a coordinated fiscal and monetary strategy aiming at creating a controlled rise of inflation to wear away a targeted fraction of debt. Under this coordinated strategy, the fiscal authority introduces an emergency budget with no provisions on how it will be balanced, while the monetary authority tolerates a temporary increase in inflation to accommodate the emergency budget. In ou...
 
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