In a war economy, the central bank does not worry about inflation

In a war economy, public spending becomes very high and the public debt ratio rise s rapidly. This may be the case in Europe if governments have to shelter households from the rise in commodity prices and sharply increase their defence spending. In such a configuration, monetary policy is no longer worried at all about fighting inflation, even if it is high. Its sole role is to facilitate the financing of fiscal deficits by monetising these deficits and keeping interest rates low. It remains to be seen whether the ECB will be forced to turn to complete “fiscal dominance”.