Robert Holzmann: Challenges of balancing monetary policy with fiscal policy

Opening statement by Dr Robert Holzmann, Governor of the Oesterreichische Nationalbank, the Austrian central bank, at the Warwick Economics Summit 2021, 5 February 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

In my opening statement, I would like to address the relationship between monetary and fiscal policy, as their successful interaction is critical for dealing with shocks, such as the economic fallout of the pandemic crisis, and what will come in its aftermath.

First, the interaction between monetary and fiscal policy has made a comeback in academic research and the broad policy discourse. It was very much part of lectures and textbooks when I was a student (well - some 50+ years ago). Back then, the questions were more basic but still relevant – e.g. what policy instruments should be assigned to which policy objective. The assigned instruments have changed across time, the exchange rate regime being a case in point, and other factors are being stressed, such as the credibility of a policy and its institution.

Recently the discussion has moved from considering monetary and fiscal policy as strategic substitutes – with state-contingent decisions of what to use when – toward thinking of both policies as strategic complements. With appropriate design and interaction, each instrument can expand the policy space of the other: Most importantly, accommodating monetary policy with low rates of interest allows fiscal policy to expand its policy scope. In turn, fiscal policy action can help the economy recover, thus taking away some of the burden from central banks to bring the economy back to potential and inflation back to target.

This reemergence of interest in policy coordination is happening in the aftermath of stressing the importance of independent central banks and their pursuit of narrow policy objectives to be effective and credible. The empirical analysis over the last decades on the effectiveness of fiscal versus monetary policy in addressing shocks suggests somewhat better outcomes for monetary policy but little existence of a complementary approach.

This leads me to my second part: Has this suboptimal individual policy approach and joint policy coordination changed with the current crisis? To stay within my time allocation, I will focus on the euro area.