Fiscal and monetary policy interactions in a low interest rate world

Benoit Mojon (Bank for International Settlements)

March 29, 2022

BDF Paris

Séminaire Banque de France


We analyse scal and monetary policy interactions when interest rate policy is hampered by the zero lower bound (ZLB) in an environment where expectations are formed with perpetual learning. The ZLB induces a deterioration of economic performance and raises the risk of persistent low ation that can disanchor in ation expectations and lead to debt de ation. Systematic use of quantitative easing (QE) can partially substitute for interest rate easing and, if suciently aggressive, can maintain average in ation in line with the central bank's goal. By compressing term premia on longterm interest rates, QE creates scal space that facilitates expansionary scal policy and reduces debt-de ation risk. The ZLB can be counteracted with less aggressive QE if mildly negative policy rates are feasible, if more countercyclical scal policy can be activated, or if the central bank can credibly communicate a clear in ation goal. Timidity in implementing QE and excessively debt-averse scal policies are counterproductive.


Zero lower bound; scal policy; debt de; ation; quantitative easing; perpetual learning;

JEL codes

  • E52: Monetary Policy
  • E58: Central Banks and Their Policies
  • E62: Fiscal Policy
  • E63: Comparative or Joint Analysis of Fiscal and Monetary Policy • Stabilization • Treasury Policy