The fiscal footprint of macroprudential policy

Abstract

Monetary policies leave a fiscal footprint. When the central bank cuts the policy interest rate, this footprint comes through multiple channels: The demand for currency rises, so the central bank prints more banknotes to accommodate it, and this creates seignorage revenues. Inflation unexpectedly rises and this lowers the real value of public debt. Rolling over this debt is cheaper as the price of newly issued debt rises. And finally, economic activity rises, so tax revenues increase and social spending falls.