Monetary and fiscal policy interactions : risks to price stability in times of high government debt

The change in macroeconomic conditions since the ECB's strategy review in 2021 towards an environment characterised by above-target inflation, high interest rates, and renewed concerns about elevated government debt has been a vocal reminder of the intricate interdependencies between monetary and fiscal policies. Against this background, our paper reviews the literature on how central banks' ability to maintain price stability is shaped by their interactions with fiscal policy and the state of the economy. According to standard models, a policy framework aimed at price stability requires suitable commitments from both monetary and fiscal authorities. When public debt burdens become too high, price stability may be at risk. The paper also draws lessons on how to mitigate such risks.