20171117-NATIXIS-Fiscal_dominance_6页_605kb

Flash Economics: Fiscal Dominance Analysis

Core Content

This document analyzes the concept of fiscal dominance and examines whether it is currently present in the United States, the euro zone, and Japan. Fiscal dominance occurs when monetary policy is constrained by the need to ensure fiscal solvency, rather than being able to pursue its usual objectives such as controlling inflation or supporting economic growth.

Key Information

• Fiscal dominance is defined as a situation where monetary policy cannot operate independently due to the necessity of maintaining fiscal solvency.
• It can manifest through monetization of public debt or by keeping interest rates abnormally low.
• The document highlights that Japan is clearly in a state of fiscal dominance, while the United States and the euro zone are in a similar situation.
• The analysis is based on the relationship between long-term interest rates, nominal GDP growth, and public debt levels.

Main Points

1. United States

• The long-term interest rate in the U.S. historically aligned with nominal GDP growth.
• If the interest rate were to return to a normal level of 4%, the interest paid on public debt would rise to 4.3% of GDP.
• This would just ensure fiscal solvency, indicating that the U.S. is in a fiscal dominance situation.

2. Euro Zone

• A return to the normal relationship between long-term interest rates and nominal growth would result in a long-term interest rate of 3.5%.
• This would push the interest paid on public debt to 3.1% of GDP in the medium term.
• The fiscal solvency of the euro zone would be just ensured, suggesting a similar fiscal dominance scenario.

3. Japan

• A normal long-term interest rate based on nominal growth would be around 2%.
• This would result in interest on public debt rising to 4.5% of GDP, which would definitely not ensure fiscal solvency.
• Therefore, Japan is clearly experiencing fiscal dominance.

Conclusion

• When fiscal dominance is present, monetary policy objectives shift from inflation targeting or cyclical support to fiscal solvency maintenance.
• The document concludes that Japan is in a clear state of fiscal dominance, while the U.S. and euro zone are in similar situations.
• The monetary policy in these regions is constantly constrained by the need to avoid a sharp rise in interest rates that could threaten fiscal solvency.

Disclaimer

• This document is intended for professionals and qualified investors only.
• It is strictly confidential and must not be disclosed to third parties without prior written consent.
• It is not a personalized investment recommendation and does not constitute financial analysis.
• No liability is accepted for any use of the information contained in this document.
• The views expressed are personal opinions and may differ from those of others within Natixis.
• The document is not approved by any regulatory body and is provided for informational purposes only.