The writer is author of ‘Blood and Treasure, the Economics of Conflict from the Vikings to Ukraine’
For decades, macroeconomic policy in advanced economies has generally followed a widely understood division of responsibility. The month-by-month management of the business cycle, and especially of inflation, is the task of central banks. Outside of severe downturns such as those in 2008 and 2020, finance ministries have stepped back from attempting to manage demand. They instead focus on attempting to stabilise or reduce the ratio of government debt to GDP.
The default scenario across the rich world now is an independent central bank setting monetary policy in order to hit a publicly stated inflation target. While a handful of exceptions exist, such as Denmark’s fixed exchange rate target, such arrangements have become increasingly common since the mid-1990s. But can they continue to operate smoothly in a time of high government debt?