With both interest and exchange rates now given, the effects of fiscal policy are no longer likely to “crowd out” or “crowd in” private sector consumption and investment. In these circumstances, fiscal policy is a relevant policy instrument for Ireland. Despite this, the impact of fiscal policy is subject to a number of limiting criteria.
This, in turn, also ensures a stable macroeconomic environment for banks. There can be no question that the top priority in this area is for national policymakers to build up fiscal buffers to ensure policy space for future downturns, just as bank supervisors now expect banks to build up capital buffers in good times.