Fiscal Policy Coordination

CEPR - Centre for Economic Policy Research - The New Global Imbalances Global imbalances are back in focus. Central banks, international organizations, the G7 and the G20 are debating their causes and remedies. This Paris Report 4 – a joint CEPR-Bruegel - Improving economic policy initiative – aims to provide independent analytical foundations for the debate, particularly for the French G7 presidency. It brings together 17 contributions on global imbalances over the past century, their current configuration among key players (the United States, Europe, and China), and perspectives from lower-income countries. The first-best solution is well known: coordinated adjustment among major economies. The United States would raise national saving through fiscal consolidation; China would rebalance toward consumption; and Europe would increase investment. This policy mix would reduce current account imbalances at their source and lower the risk of destabilising spillovers. But such coordination is unlikely. The relevant question is how the global economy adjusts in its absence – and what this implies for the rest of the world. Absent coordinated adjustment, global imbalances will persist and their risks will shift to the rest of the world. The United States poses primarily financial risks, linked to its external liabilities and central role in the global financial system. China poses structural challenges, tied to its export dominance and industrial policies. Europe risks contributing to both through weak investment. In this environment, the rest of the world faces four objectives: creating buffers that help deal with crisis risks, particularly if the latter are accompanied by a breakdown in international cooperation with the US; mitigating the short-term impact of Chinese import competition, supporting structural transformation; and preserving the rules-based trading system. The last three objectives are in tension. Protectionist measures can shield domestic industries but risk undermining long-term competitiveness and trade integration. Conversely, rapid structural adjustment can impose significant social costs. The challenge is to balance these objectives without undermining the foundations of the global economy. The appropriate response is therefore a combination of resilience, adaptation, and cooperation.

🚨 New Publication Alert 🚨 📘 'Inflation and Policy Coordination in High-Inflation Environments' 🖊️ Co-authored by DR. IDRIS A. ADEDIRAN and Tirimisiyu Oloko We’re excited to share our recent publication, which tackles a pressing challenge faced by many economies today: Why are conventional monetary policy tools—like inflation targeting—failing in high-inflation countries? 🔍 What we found: Traditional tools alone are ineffective because non-monetary forces—such as fiscal spending, geopolitical risks, and inflation expectations—are the real culprits. Fiscal authorities are often not held accountable, even though their actions significantly fuel inflation. Our panel data analysis (2010–2023) shows that effective inflation management requires coordinated monetary and fiscal strategies, not just central bank interventions. 📊 We recommend a policy coordination framework where: ✅ Both monetary and fiscal authorities target inflation together ✅ Clear inflation targets are communicated transparently ✅ Fiscal policies support price stability goals ✅ Supply-side interventions are integrated (e.g. support to agriculture & manufacturing) This is more than an academic exercise—it's a call for reimagining inflation governance in resource-constrained and inflation-prone economies. 🔗 Read more here: https://lnkd.in/e52hrxGD #Inflation #PolicyCoordination #FiscalPolicy #MonetaryPolicy #DevelopmentEconomics #EmergingMarkets #PriceStability #Research

Governor Ueda made his much anticipated trip to Nagata-cho today, meeting with PM Takaichi and fulfilling the BoJ’s responsibility under the 2013 Abe-BoJ Accord. “We had candid, good talks on the economy, prices, financial developments, as well as monetary policy, I told the prime minister the BOJ was gradually adjusting the degree of monetary easing to guide inflation smoothly toward its 2% target.” Given that the Bank’s View for the second half of FY25 has been realised, the logical interpretation of Ueda’s ‘smoothly’ comment would be that he made a case for financial stability and a need for more progress on rate normalisation, and that this was still consistent with the ‘policy coordination’ objective within the Accord. By citing Yen weakness and the rise in JGB long-end yields, he should be able to convince Takaichi that a BoJ rate hike is what would allow her to implement the more aggressive fiscal stimulus announced. This policy coordination challenge for the BoJ will not disappear until it can manage to renegotiate the Abe-BoJ Accord. Abe’s insistence on policy coordination back in 2013 was the correct alignment to pursue, it formed an integral part of the Three Arrows strategy. However, circumstances in 2025 differ greatly. Takaichi is already finding out how hard it is to pursue pro-growth fiscal policies at much higher national debt levels and with no yield curve control in place. Three Arrows’ policy coordination needs a makeover. Takaichi can still emulate Abe by introducing intelligent policy coordination, rather than simple directional coordination. We are way past the moment where Japan can ram through large fiscal stimulus risk-free.

Fiscal Space Is Not Just Shrinking. It Is Starting to Bind. For years, fiscal space was treated as a buffer. Now, it is becoming a constraint. A new BIS paper—“The Perils of Narrowing Fiscal Spaces”—makes a sharp point: high public debt is no longer just a fiscal issue. It is beginning to reshape monetary policy itself. Here is the uncomfortable shift. When debt is large, interest rates stop being just a tool to fight inflation. They become a fiscal risk. Raise rates—and debt servicing costs surge. Hold rates—and inflation risks linger. That tension creates something new. A hidden ceiling on interest rates. The BIS shows that as debt rises, central banks face an implicit upper bound on how far they can tighten—because beyond a point, higher rates destabilize public finances. This is not theoretical. In some economies, interest payments are already absorbing a growing share of revenues, crowding out spending and limiting policy choices. And this is where the real risk begins. First, monetary policy becomes constrained. Central banks may hesitate to tighten fully—even when inflation calls for it. Second, inflation bias emerges. If markets believe rates cannot rise enough, expectations adjust—and inflation becomes harder to anchor. Third, fiscal dominance creeps in. Monetary policy starts reacting to fiscal sustainability, not just price stability. Fourth, shocks become more dangerous. Especially supply shocks—because they raise inflation and worsen fiscal positions at the same time. What the BIS highlights is a deeper shift in the policy regime. For decades, we assumed a clean separation: Fiscal policy manages budgets. Monetary policy manages inflation. That boundary is now eroding. High debt is tying the hands of central banks. And that changes how the next crisis will be managed. So what should policymakers do? Not abrupt austerity. But credible, forward-looking strategies: – rebuild fiscal buffers gradually – improve the composition of spending – strengthen fiscal institutions and rules – and explicitly account for debt-service sensitivity in policy design The key insight is simple, but easy to ignore: Fiscal space does not disappear suddenly. It tightens quietly—until it starts to bind. And when it does, it does not just constrain fiscal policy. It constrains the entire macroeconomic framework. The risk is no longer just high debt. It is losing control of the policy mix. Read the BIS paper here: https://lnkd.in/ezeQgVuw #FiscalPolicy #MonetaryPolicy #Debt #Macroeconomics #BIS #Inflation #EconomicPolicy #GlobalEconomy

💡 Rate cuts won’t work at this juncture. India’s yield curve is flattening, long-term bond yields are falling, and monetary transmission remains sluggish. The bond market is signaling one thing clearly: investors are not betting on a growth rebound, despite the RBI’s easing stance. What we need now is serious fiscal discipline and targeted public investment, not more repo rate cuts. Monetary policy alone can’t revive demand when structural bottlenecks and risk aversion dominate. Time for a coordinated fiscal-monetary reset. #IndiaEconomy #YieldCurve #RBI #FiscalPolicy #MacroEconomics #PolicyInsights