Fiscal dominance

Fiscal dominance is a macroeconomic condition in which government fiscal pressures (high public debt and deficits) effectively dictate or constrain a country’s monetary policy. In a fiscally dominant regime, the central bank’s usual objective of controlling inflation becomes secondary to the Treasury’s budget financing needs, often leading the central bank to accommodate government borrowing by keeping interest rates low or buying government debt. This situation tends to create inflationary pressure – countries under fiscal dominance commonly experience higher inflation, and in extreme cases hyperinflation. Fiscal dominance is contrasted with monetary dominance, where the central bank can focus on price stability and the government adjusts its spending or raises taxes to ensure debt remains sustainable. The concept of fiscal dominance gained renewed attention in the 2020s amid unprecedented pandemic-related fiscal expansions and rising public debt levels, which have raised concerns in several economies.

As discussed below under Examples, the term "fiscal dominance" may also be used when regulatory policy is compromised due to fiscal considerations.