The Fiscal Dimension of Monetary Policy and Central Bank Autonomy: Lessons from Two Crises

16 Pages Posted: 15 Mar 2022 Last revised: 30 Mar 2022

See all articles by Athanasios Orphanides

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Asia School of Business

Date Written: February 1, 2022


Comparing and contrasting the Fed’s and ECB’s policy responses to the 2008 Global Financial Crisis (GFC) and the COVID-19 pandemic highlights the importance of the fiscal dimension of monetary policy and the pitfalls that can arise when the synergy of fiscal and monetary policy is neglected by an independent central bank. For the ECB, two critical changes in its policy response led to notably better outcomes in the aftermath of the pandemic. In contrast to the hesitation it exhibited in 2008, the ECB expanded its balance sheet more appropriately in 2020 with decisive purchases of long-term government debt. Furthermore, the ECB suspended elements of its policy framework that had impaired the functioning of government debt markets, such as the reliance on credit rating agencies for determining the eligibility of government debt for monetary operations. By protecting government bond markets from the self-fulfilling adverse equilibria that the ECB had tolerated in the aftermath of the GFC, the ECB supported a low cost of refinancing government debt in the euro area overall, instead of only in selected Member States. This facilitated more expansionary fiscal policy that supported a more robust recovery, and protected against the further fragmentation of the euro area.

Keywords: Fed, ECB, monetary policy, quantitative easing, collateral eligibility, fiscal interactions

JEL Classification: E4, E5, E6

Suggested Citation

Orphanides, Athanasios, The Fiscal Dimension of Monetary Policy and Central Bank Autonomy: Lessons from Two Crises (February 1, 2022). MIT Sloan Research Paper No. 6609-22, Available at SSRN: or

Athanasios Orphanides (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States


Asia School of Business ( email )

Jalan Kuching, Kuala Lumpur, Wilayah Persekutuan K
Kuala Lumpur, MA

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