Agnès Bénassy-Quéré: The policy mix in a world of supply shocks

Speech by Ms Agnès Bénassy-Quéré, Second Deputy Governor of the Bank of France, at the University of Bordeaux, Bordeaux, 3 October 2024.

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

Ladies and Gentlemen, dear Students,

Today I would like to discuss with you the policy mix in a world of supply shocks, a subject of growing importance in the global economic landscape. I will share my views on how monetary and fiscal policy should adapt to this new macroeconomic environment.

The conventional policy mix

Let me start by recalling what the conventional policy mix is. Imagine a funnel, like the one described by James Tobin (1987). Above, we have monetary policy, represented by the M-tap, and fiscal policy, denoted by the F-tap. These two policies feed into the funnel, which represents aggregate demand. This demand flows into a container below, whose water level symbolises supply. The splashes represent production (Y) and the general price level (P).

This conventional view of the policy mix shows how the combination of monetary and fiscal policies influences activity and prices through its impact on aggregate demand. However, these two 'demand-side' policies are not entirely substitutable. Table 1 summarises their differences.