Fiscal Dominance Risk: Implications for Credit Union Capital and ALM
Recent remarks by Janet L. Yellen, delivered at the Brookings Institution, raise an issue that deserves a place in credit union capital and ALM planning: fiscal dominance.Fiscal dominance refers to a macroeconomic regime in which budgetary policy considerations play a larger role than monetary policy in shaping macroeconomic outcomes. In this environment, rising government debt and persistent deficits constrain the Federal Reserve’s ability to pursue price stability and full employment independent of the government’s financing needs. Monetary policy becomes secondary, explicitly or implicitly, to fiscal sustainability concerns, with adjustment occurring through higher inflation, policy-driven suppression of real interest rates, financial repression, or increased macroeconomic v...