To sum up, excessively pro-active monetary and fiscal policies may induce the public and private sectors to accumulate excessive amounts of debt. When debt becomes unsustainable, and agents have to curtail their consumption to repay it no matter what, monetary and fiscal policies tend to lose their effectiveness in smoothening consumption and income growth.
When a debt crisis occurs, the only role that monetary and fiscal policy can fulfil is one of redistribution – rather than stabilisation – by “socialising” the debt burden. The way in which monetary policy can redistribute the effects of the financial crisis is through an inflation tax which reduces the burden of net debtors and the wealth of net creditors.