Finance & Development – IMF
Published in the March 2026 issue of Finance & Development, this article by Giancarlo Corsetti and Leonardo Melosi — both professors of economics at the European University Institute — examines growing tensions between monetary and fiscal policy coordination in an era of geopolitical instability. Advanced economies are facing a difficult combination of high public debt and persistent inflation. At the same time, debt levels continue to rise. The authors argue that geopolitical fragmentation undermines the conditions that once made policy coordination effective. As a result, a rethinking of macroeconomic stability is required.
When the Textbook Solution No Longer Works
Historically, monetary-fiscal coordination worked under specific conditions. After the global financial crisis, both policies moved in the same direction. They stimulated aggregate demand without destabilizing fiscal outlooks and helped counter deflationary pressure. Moreover, international relations still reflected the cooperative framework of Bretton Woods. However, this environment has changed significantly.
In addition, supply disruptions — amplified by trade fragmentation and geopolitical tensions — now place fiscal and monetary policy in conflict. When central banks tighten policy to reduce inflation, real interest rates increase. Consequently, economic growth slows. This dynamic widens the primary deficit and raises the real burden of debt. Without fiscal consolidation, the outcome may be an uncontrolled inflationary spiral.
The Role of Controlled Inflation
In this context, the authors introduce the concept of “fiscal inflation” as a pragmatic tool. Geopolitical tensions, rising defense spending, and weaker growth prospects are eroding fiscal positions. As a result, fiscal backing becomes weaker. This increases the risk of persistent inflationary pressures.
Given already high debt levels, fiscal adjustment must remain gradual. Therefore, sustainable adjustment may require tolerance for moderate and temporary inflation. This approach must avoid undermining central bank credibility. In practice, central banks buy time by stabilizing inflation in the short term. Meanwhile, productivity gains — potentially driven by artificial intelligence — may help reduce the debt burden over time.
A Global Public Good at Stake
The authors draw a historical parallel. By the mid-1960s, fiscal imbalances were already elevated. Governments also struggled to resolve disputes with major oil-producing countries. Consequently, these tensions contributed to a severe inflationary episode.
In response, Corsetti and Melosi call for stronger international cooperation and a broader policy framework. Specifically, they propose extended collaboration that integrates domestic and cross-border policies. This approach would help maintain a path toward sustainable fiscal adjustment. Ultimately, macroeconomic stability should be understood as a global public good. It requires coordinated action across countries to be preserved.
Reference
Corsetti, G., & Melosi, L. (2026, March). Policy coordination for fractured times. Finance & Development, IMF. https://www.imf.org/en/publications/fandd/issues/2026/03/policy-coordination-for-fractured-times-giancarlo-corsetti