Monetary and fiscal policies as anchors of trust and stability

Speech by Mr Agustín Carstens, General Manager of the BIS, at Columbia University, New York, 17 April 2023.

For the first time in decades, high inflation and financial stress have emerged in tandem. They each have their own specific causes, but together they signal that the boundaries of monetary and fiscal policy's "region of stability" are being tested. The approach to the region's boundaries is visible across a number of dimensions: large fiscal deficits, high public debt and central bank balance sheets, together with the historically and persistently low interest rates that prevailed before the inflationary surge. These policy settings are the result of a decades-long journey where sequential policy decisions, often in response to crises, have progressively driven debt levels up and interest rates down. At each step, the policy choices seemed reasonable, even compelling. But cumulatively, they have brought us to an extraordinarily complex place where the risks to macroeconomic and financial stability loom large and the tensions between monetary and fiscal policies are growing. A shift in policy mindset is called for. Policymakers must acknowledge the limitations of stabilisation policies and they need to leave room for policy manoeuvre over time. Only by doing so can authorities preserve trust in government policies and ultimately in the key functions of the state.