Thomas Jordan: Monetary policy and government debt - different
perspectives
Summary of a speech by Mr Thomas Jordan, Member of the Governing Board of the Swiss
National Bank, at the 13th Zermatter Symposium, Zermatt, 28 August 2007.
The complete speech can be found in German on the Swiss National Bank's website (www.snb.ch).
* * *
The effects of fiscal and monetary policy overlap. Fiscal policy can have a cyclical effect,
while monetary policy can also generate income for the government. However, theory and
practise have shown that, first and foremost, monetary policy must be used to ensure price
stability and - to a limited extent - to dampen economic fluctuations. The principal aim of
fiscal policy, however, must be to ensure that the national budget is financed as efficiently as
possible. When government debt levels are high and budget deficits get out of hand, they
pose a significant threat to a monetary policy that is geared to stability. Misusing monetary
policy as an instrument of fiscal policy inevitably leads to a loss of purchasing power. Many
episodes of high inflation have come about, ultimately, as the result of funding requirements
on the part of the state. Nowadays, the independence of many central banks shields them -
to a large extent - from the fiscal greed of politicians. Nevertheless, time and time again,
when government finances have fallen into disarray, central banks have been seen to come
under political pressure. From a monetary viewpoint, however, government debt is not
entirely unwelcome. On the contrary, government debt is a vital ingredient of modern
monetary policy. A liquid market for government bonds is a prerequisite for a modern and
efficient financial market. Functioning financial markets, in turn, are necessary for an efficient
monetary policy: a liquid market for governments bonds enhances the efficiency of the
monetary transmission mechanism. Yields on government bonds and indicators derived from
these yields are an important source of information for the monetary policy decision making
process. Finally, in implementing government policy, government bonds serve as collateral.
Sound government finances are a prerequisite for the long-term success of monetary policy
and for maintaining price stability. However, healthy government finances do not necessarily
imply zero government debt. For the functioning of financial markets and an efficient
monetary policy, a liquid market for government bonds is a considerable advantage.