A second dimension of adherence is that the BIS central banks have signalled their commitment by announcing that they themselves will follow the Code, and that they expect that their counterparties will do so too.6 In the case of the RBA, we will require that our counterparties sign the Statement of Commitment, just as we will ourselves.
In other words, the central bank must eventually monetize the debt – whereby high rates of inflation devalue longer-term government debt. Today, one of our speakers, Eric Leeper, will discuss his work on how long-run fiscal stress can undermine monetary control of inflation. In such an environment, monetary policy is no longer independent but becomes subservient to unsustainable fiscal policy.