The real problem of economic policy

Monetary and fiscal policy can’t remain separate

Inflation is up the world over and Central Banks are doing the one thing they can do to combat it: they’re raising interest rates. But as recently demonstrated in the U.K., government budgets can sabotage the work Central Banks try to do: increases in government spending can further fuel inflation. It’s time to question the strict separation of the monetary policy of central banks from the fiscal policy of governments and advocate for closer coordination between the two, argues Charles Goodhart.

 

Ever since the adoption of central bank independence in the early 1990s, the operations of monetary and fiscal policies have been formally separated: governments were responsible for the latter and central banks for the former.  Recent developments suggest that this strict separation needs reconsideration. The main function of central banks, that of controlling the level of inflation, may well prove impossible so long as government fiscal policy remains as expan

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