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Ignored in economics textbooks for a long time, the notion of the monetary-fiscal policy mix has made a spectacular come back. The reason is the extraordinary macroeconomic policy support required to tackle the devastating economic fallout from the COVID-19 pandemic. In many countries, the crisis hit while already very low interest rates and record high public debts seemed to severely constrain available policy space. Clearly, neither monetary policy easing, nor fiscal stimulus could on its own pull economies out of the ditch.

To deliver the required macroeconomic stabilisation, monetary and fiscal authorities had to join forces and pull together, blurring the traditional boundaries between monetary and fiscal interventions. Are we witnessing a policy revolution that will shatter the decades-old consensus on the respective roles of central banks and treasuries? Or are we just going through an epic stress test motivating an adaptation of the paradigm in place?

The 23rd Geneva Report on the World Economy shows how monetary and fiscal authorities have been rediscovering how to exploit complementarities between their instruments most effectively. It stresses that the desirable coordination between central banks and treasuries can only work if the credibility of their commitment to desirable long-term goals – healthy growth under price stability and public debt sustainability – is preserved and backed by a resilient institutional framework. To restore the ability to deploy an adequate policy response to current and future disturbances, the report urges policymakers to develop a strategy aimed at regaining policy space on both sides of the mix. It argues that an internationally coordinated effort to correct excessive saving and insufficient investment globally could raise equilibrium interest rates and set in motion a virtuous circle of stronger growth and decreasing indebtedness.

Download the report here.