Even the room for automatic stabilizers to work, while staying within the rules of the Stability and Growth Pact, is extremely limited. This situation highlights the need for governments to undertake the fiscal reforms necessary to generate a fiscal balance or surplus over the economic cycle.
Only in this way can fiscal policy be available as a tool to counter the impact of any future negative supply shocks. Conclusions To conclude, the message of this paper is that central banks should not respond to negative supply shocks by loosening monetary policy.