NEW REPORT: How Do You Solve a Problem Like Inflation?
I’m pleased to share my latest publication, How Do You Solve a Problem Like Inflation? The Case for Monetary-Fiscal Coordination, published by the New Economics Foundation (NEF) and co-authored with Lydia Prieg, Sebastian Mang, Dominic Caddick, and Theo Harris. This report revisits decades of inflation management and makes the case for a more collaborative approach between monetary and fiscal policies.
With inflation resurfacing as a major global concern, our analysis highlights the limitations of traditional central bank tools—such as interest rate hikes—particularly when inflation is driven by supply-side shocks. We argue that tackling inflation effectively requires a more integrated policy framework that allows monetary and fiscal authorities to work in tandem. Instead of treating inflation solely as a monetary phenomenon, we emphasize the need for tailored responses based on its multiple potential root causes.
Modernizing inflation management
Our report advocates for a more integrated approach, enabling governments and central banks can more effectively manage inflation while promoting investments that address long-term challenges, such as transitioning to a green economy. Ultimately, how monetary and fiscal policies should optimally coordinate and respond to problems should depend on the underlying causes of inflation. Interest rates policy alone may not always be the most optimal response.
For instance, during deflationary periods, central banks have a broad set of tools beyond interest rate cuts—ranging from yield curve control and QE to more direct measures like strategic QE, public investment financing, or even direct transfers to households (helicopter money). Governments, in turn, could leverage these conditions to invest in future growth and long-term price stability.
Conversely, when demand-driven inflation surges, interest rate hikes remain a necessary policy response. However, when inflation is primarily supply-driven—as seen in energy crises—fine-tuned interventions are preferable. Instruments like differentiated interest rates (e.g., green TLTROs) can support investments that address supply bottlenecks, contributing to medium-term price stability. Meanwhile, governments can play a critical role by reinforcing strategic storage capacity, addressing supply constraints, implementing windfall taxes where justified, and enforcing antitrust laws.
To put these ideas into practice, we need to rethink the institutional boundaries between monetary and fiscal policy while maintaining central bank independence and democratic accountability. For this purpose, an evolution of the existing institutional setup would be required. Our report proposes formal mechanisms to clarify central banks’ secondary mandates, ensuring they can support broader economic objectives. Inspired by the work of Eric Monnet, we also recommend the creation of an independent Economic Coordination Council (ECC) — a multidisciplinary advisory body that could help identify coordination opportunities and navigate distributive trade-offs that central banks are reluctant to address. While the ECC would have no binding authority, its recommendations should be publicly acknowledged, with central banks and governments required to justify any decision to disregard them. Finally, further steps towards a proper fiscal union and reformes of the EU’s fiscal rules would be warranted.
This report contributes to the ongoing debate on how to modernize macroeconomic governance in a way that ensures both economic stability and investment in long-term societal challenges, such as the green transition.
To cite the report:
Prieg, L., Mang, S., Caddick, D., Jourdan, S. and Harris, T. (2025) How do you solve a problem like inflation? The case for monetary-fiscal coordination. New Economics Foundation. Available at: https://neweconomics.org/uploads/files/how-do-you-solve-a-problem-like-inflation.pdf.
This post is also available in: French