Fiscal Policy, Public Debt Management and Government Bond Markets: Issues for Central Banks

Abstract

The global financial crisis showed that both authorities and markets failed to properly assess the size and the evolution of the public debt stock in various economies. In some countries the monetary authorities focused excessively on inflation, without taking into account other key macroeconomic variables and ratios. That said, it is important to ask why some macroeconomic variables were able to follow such unsustainable paths for lengthy periods. Part of the explanation is the scenario of strong growth, with high international liquidity and low inflation, that prevailed before the crisis. In addition, EU countries, especially the less developed ones, were able to reduce their financing costs after the introduction of the euro. In this paper, we also examine the role played by economic authorities, and the interrelationships among them in the design and implementation of fiscal policy and debt management in response to the crisis. Rigid central bank goals and inflexible boundaries between the central bank and the treasury were erased, allowing the economic authorities to behave in a pragmatic way. Finally, we discuss the role played by credit rating agencies and regulatory frameworks.

Full publication: Fiscal policy, public debt and monetary policy in emerging market economies

Keywords: Monetary policy, public debt

JEL Classification: E42, E52, E63