Monetary policy can affect fiscal spillover
Interventions by central banks can impact the magnitude and nature of a spillover from regional fiscal policy, a new paper from Banque de France posits.
The research reveals that by pegging an interest rate, the monetary authority can insulate the agents in one region from inflation and interest-rate movements induced by the fiscal policy in another region. The paper finds that key to the insulation is that the rate to which the monetary authority is pegging is the same as the return on agents' portfolios. By pegging an interest rate, the link between the level of debt in one region and the return earned by households in other regions is broken.
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