The last review of the ECB’s monetary policy strategy in 2003 followed a period of predominantly upside risks to price stability. Experience following the 2008 financial crisis has focused renewed attention on the question of how monetary and fiscal policy should best interact, in particular in an environment of structurally low interest rates and persistent downside risks to price stability. This debate has been further intensified by the economic impact of the coronavirus (COVID-19) pandemic. In the euro area, the unique architecture of a monetary union consisting of sovereign Member States, with cross-country heterogeneities and weaknesses in its overall construction, poses important challenges. Against this background, this report revisits monetary-fiscal policy interactions in the euro area from a monetary policy perspective and with a focus on the ramifications for price stability and maintaining central bank independence and credibility. The report consists of three parts. The first chapter presents a conceptual framework for thinking about monetary-fiscal policy interactions, thereby setting the stage for a discussion of specifically euro area aspects and challenges in subsequent parts of the report. In particular, it reviews the main ingredients of the pre-global financial crisis consensus on monetary-fiscal policy interactions and addresses significant new insights and refinements which have gained prominence since 2003. In doing so, the chapter distinguishes between general conceptual aspects – i.e. those aspects that pertain to an environment characterised by a single central bank and a single fiscal authority and those aspects that pertain to an environment characterised by a single central bank and many fiscal authorities (a multi-country monetary union). The second chapter reviews the experiences and challenges of monetary-fiscal policy interactions in the Economic and Monetary Union (EMU) and how these have evolved since the last strategic review. It starts by recalling policy views on the allocation of roles between monetary and fiscal authorities as well as between national governments and European institutions at the start of EMU. It then illustrates the strengths and weaknesses of this set-up, based on the experiences of the past two decades. The chapter finishes with an overview of the euro area institutional framework and policy toolbox as it was before the COVID-19 pandemic struck. The third chapter begins with a review of the monetary and fiscal developments triggered by the COVID-19 pandemic. It then takes a forward-looking perspective and addresses the options and challenges for monetary-fiscal policy interactions in a post-pandemic environment characterised by a low natural rate. The assessment takes the current EMU institutional framework as a given. At the same time the report acknowledges that any changes to the architecture may have important implications for the interaction between monetary and fiscal policy in EMU. Some considerations regarding the agenda for EMU reform are offered in the final section of the report. The report summarises the work done by a dedicated European System of Central Banks (ESCB) strategy review work stream on monetary-fiscal policy interactions – mandated by the Monetary Policy Committee – which served as input for the Strategy Review Seminar on monetary-fiscal policy interactions. Alongside the main text the report contains 19 standalone boxes on specific aspects of monetary-fiscal policy interactions, which have been drafted under the responsibility of individual members of the work stream and do not necessarily reflect the views of all work stream members.
