One solution is to combine them –- for example, by letting central banks create money to finance government budget deficits. The challenge, say the BlackRock authors, is to encase such “historically unusual’’ measures in explicit rules — so that central bankers retain their independence, and can apply the brakes if government spending gets out of control.
Their proposal involves an emergency fiscal fund that central banks could activate when inflation is dangerously below-target and there’s no room to cut rates. The money-tap would shut off automatically once prices are back on track.
