Government debt in the advanced economies is projected to jump from the pre-crisis level of 78 per cent of GDP in 2007 to 118 per cent by 2014 assuming some discretionary tightening beginning this year. In such a scenario, what are now seen as cyclical fiscal deficits may, in fact, morph into structural fiscal deficits.
We may then see the return of fiscal dominance and undermining of the independence of central banks. 40. I spoke earlier about the role of central banks in preserving financial stability, and in particular, about how the responsibility for financial stability may be delineated.