Monetary policy alone is insufficient

“2021 Annual Economic Report,” Bank for International Settlements, June 2021, https://www.bis.org/publ/arpdf/ar2021e.pdf

Macroeconomic stability

While monetary policy plays a key role in promoting macroeconomic stability, it cannot deliver it on its own. This is true regardless of the nature of the business cycle. It is well known, for instance, that fiscal sustainability is a prerequisite for macroeconomic stability, and that it can be especially constraining in EMEs (Chapter I). But changes in the nature of the business cycle have brought the limits of what monetary policy can do into starker relief. In order to better understand the need for complementary policies, consider a stylised business cycle associated with a financial recession.