Skip to content

FRM Part II · FRM Exam Part II · Monetary and Fiscal Policy: Safeguarding Stability and Trust

Which development would most undermine the credibility of forward guidance and raise concern about fiscal dominance?

Central bank purchases of government debt that seem aimed at easing public financing rather than achieving the inflation target would most damage credibility and signal fiscal dominance. Clear targets, communication and pre-announced balance sheet reduction all enhance transparency and support the credibility of guidance.

  1. ALarge central bank purchases of government debt that appear aimed at easing government financing rather than meeting the inflation targetCorrect
  2. BPublication of a clear inflation target and policy reaction function
  3. CRegular press conferences explaining the policy outlook
  4. DGradual and pre-announced reduction of asset holdings

Explanation

Fiscal dominance arises when monetary policy is shaped by the government's financing needs. Purchases that appear to support debt funding rather than the inflation target weaken the credibility of commitments about future policy. The other options improve transparency and predictability.

Did you get it right without looking?

One question tells you little. A timed set on Monetary and Fiscal Policy: Safeguarding Stability and Trust shows your real accuracy, how long you take and where you lose marks.

Practise Monetary and Fiscal Policy: Safeguarding Stability and TrustFree diagnostic mock

More Monetary and Fiscal Policy: Safeguarding Stability and Trust questions