Report
Patrick Artus

Can central banks win back power from governments?

In the United States, it is likely that the Federal Reserve will cut its interest rates if the policy conducted by Donald Trump (trade war with China) reduces US growth (via an objective or subjective mechanism). In the euro zone, it is likely that the ECB would intervene if there was a risk of a public debt crisis in a euro-zone country that had lost its solvency because of the increase in its fiscal deficits. There is therefore a moral hazard: governments know that they are insured by central banks if their economic policies turn out to be negative. Trump then ha s no reason to stop the trade war, and euro-zone countries have no reason to limit their fiscal deficits. There could be another equilibrium where central banks would refuse to correct the effects of the governments’ bad policies, and could thereby discipline governments.
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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