Report
Patrick Artus

Is it normal for monetary policy to be countercyclical?

It is perfectly legitimate for fiscal policy to be countercyclical, since the government can more easily than other economic agents borrow in years of recession and repay in years of expansion. But over time, monetary policy has also bec o me increasingly countercyclical, whereas it initially was supposed to lead to stable inflation over the medium term and to provide the right amount of liquidity to the economy, i.e. it was supposed to be fairly stable . Monetary policy has become highly countercyclical, especially to enable fiscal policy to be countercyclical. But is it natural for monetary policy to be countercyclical, as is the case with fiscal policy? There are two problems: The effect of interest rates on the economy is slow (about a year and a half) while the effect of public spending is instantaneous; By monetising public debt in recessions, central banks give rise to moral hazard and a balance of power in favour of governments that leads them to no longer reduce public debt ratios in growth periods, the result being that central banks are forced to maintain expansionary monetary policies. It is therefore much less normal for monetary policy than for fiscal policy to be countercyclical, which could have led to another organisation where fiscal policy is very countercyclical and monetary policy is not.
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

Other Reports from Natixis

ResearchPool Subscriptions

Get the most out of your insights

Get in touch