Monetary policy in the US and the Eurozone has been manipulated by fiscal policy - Natixis

Monetary policy has clearly been manipulated by fiscal policy (fiscal dominance) since the end of the improvement in public finances in 2014 made it necessary for monetary policy to ensure fiscal solvency, explains Patrick Artus, Research Analyst at Natixis.

Key Quotes

“We start with the way fiscal solvency has been restored since the crisis in the United States and the euro zone:

• Until 2014, there was first a restrictive fiscal policy in the United States and the euro zone;
• Then fiscal policy stopped becoming more restrictive; the return of growth admittedly continued to reduce the fiscal deficit somewhat, but the structural fiscal deficit (corrected for the cyclical position) no longer shrank;
• It was from this time that monetary policy started to ensure fiscal solvency, with long-term interest rates that were markedly lower than nominal growth.”

“We can have two interpretations of this mechanism:

- Monetary policies became highly expansionary for another reason, which enabled governments to no longer reduce their structural fiscal deficits (the improvement in fiscal deficits resulted from growth and not from the choice of fiscal policy);

- As governments stopped reducing their structural fiscal deficits, the central banks were forced to ensure fiscal solvency.”