Since last year, all major economies have experimented with an unprecedented scale of monetary-fiscal policy coordination to cope with the COVID-19 pandemic. Such a prompt, bold approach prevented the worst-case scenario of massive, prolonged layoffs and corporate bankruptcies around the world.

The closer policy coordination reflects the views embraced by academics and economists in the countries that struggled with limited inflationary pressure before the pandemic. Namely, that fiscal stimulus is desirable when the effectiveness of unconventional monetary easing tools diminishes over time; that the crowding-out effect on private investment would be limited under zero lower bound on interest rates; and that higher levels of public debt could be sustained as long as central banks can maintain large-scale purchases of government bonds.

Emboldened by such views, advanced economies including the Eurozone, Japan and the United States expanded fiscal deficits and public debt since the pandemic.