policies reinforced each other, preventing a collapse of the euro area economy. in the current environment, there is a risk that monetary and fiscal policies may pull in opposite directions, leading to a suboptimal policy mix. many fiscal measures that are popular among the electorate, such as tight price caps or broad - based subsidies, risk fuelling medium - term inflation further, which could ultimately force monetary policy to raise interest rates beyond the level that would be seen as appropriate without fiscal stimulus. governments need to internalise the effects of their actions on future inflation and monetary policy. they should support fiscal sustainability and price stability by targeting their measures to the most vulnerable parts of society, fostering potential growth and accelerating the green transition. such measures would dampen inflationary pressures over the medium to long run. monetary policy can best contribute to macroeconomic stability and social welfare by ensuring a timely return of inflation to target, thereby preserving people ’ s purchasing power, and supporting investment by reducing uncertainty. thank you. annexes 24 november 2022 slides english 1. schnabel, i. ( 2021 ), “ unconventional fiscal and monetary policy at the zero lower bound ”, speech at the third annual conference organised by the european fiscal board, 26 february. reichlin, l., ricco, g. and tarbe, m. ( 2021 ), “ monetary - fiscal crosswinds in the european monetary union ”, cepr discussion paper series, no 16138, centre for economic policy research, may. 2. lagarde, c. ( 2022 ), “ monetary policy in a high inflation environment : commitment and clarity ”, lecture organised by eesti pank, 4 november. 3. sims, c. ( 2016 ), “ fiscal policy, monetary policy and central bank independence ”, address at the annual economic policy symposium organised by the federal reserve bank of kansas city, jackson hole, 26 august. schnabel, i. ( 2020 ), “ pulling together : fiscal and monetary policies in a low interest rate environment ”, speech at the interparliamentary conference on stability, economic coordination and governance in the european union, 12 october. 4. for a comprehensive overview and discussion of monetary and fiscal policy interactions in the euro area, see ecb ( 2021 ), “ monetary - fiscal policy interactions in the euro area ”, occasional paper series, no 273, september. 5. schnabel, i. ( 2022 ), “ monetary policy

warm and not too cold, and stable disequilibrium. this is an episode in our history where variability of growth in real output has declined along with the variability in inflation. along the way, imbalances in the global economy began to build up. the imbalances manifested themselves in huge trade surpluses and an accumulation of foreign exchange reserves in the countries which relied on export - oriented growth – including those in the asian region. they were reflected in the dollar revenue which was subsequently reinvested in us financial markets – which in turn helped to finance the us saving deficit, permitting these imbalances to remain uncorrected for a prolonged period of time. and as a result, asset price bubbles were also allowed to persist for a prolonged period as well. all was well as long as everyone continued to grow. however, as emerging markets opened up, global demand, and particularly demand from growing economies like china and india, drove up the prices of oil and other global commodities. many economists began to predict a structural shift in global demand and changing dynamics of global inflation which would effect domestic prices and make inflation higher and more persistent. 3. coping with the global financial crisis at the same time, problems were brewing on the financial side in the advanced economies. i will not lay out the causes of the financial crisis here, as that has been discussed widely elsewhere. in a nutshell, the slowdown in the us housing market, coupled with a mix of troubled banking practices, regulatory blind spots, and absolute faith in the market mechanism, among other things, led to a financial crisis in advanced economies. but the important point here is that financial innovations, coupled with technological advances in communications, helped to link financial markets across the globe. this globalization of financial services allowed the collapse of major financial centers to spread to the rest of the globe so efficiently. in fact, these very financial instruments which had been earlier used to diversify risks turned out to be the very means for spreading contagion. the spread of the impact of the financial crisis onto the global real economy through the trade channel changed the world ’ s economic outlook rapidly and dramatically. this had a drastic impact on the inflation outlook, and the threat of inflation has rapidly shifted to one of possible deflation. at the same time, central banks are running out of traditional monetary policy ammunition to fight the slowdown in growth and potential deflation – namely cutting interest rates. given the increasing influence of external factors on global inflation dynamics,