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Expansionary-for-longer fiscal policy allied to ‘lower-for-longer’ interest rates can help recover Covid pandemic outlook losses and bring inflation close to the ECB’s 2% target, argues a working paper published by the European Monday, offering a strong case for fiscal and monetary policy coordination in such a situation.
An analysis of the period up to the end of 2019 found that a consistently countercyclical fiscal policy could have created a fiscal buffer that would in turn have been able to eliminate a large portion of the euro area’s second downturn, it is claimed.
“In turn, the post-pandemic simulations until 2030 reveal that certain combinations of policy rules can be particularly powerful in reaching favourable macroeconomic outcomes [...] This provides a strong case for coordination of the two policies in this situation," the paper adds.