9 Reflecting this problem, the latest round of the financial crisis since early May 2010 was triggered by concerns about the current and future state of the public finances in some euro area countries [slide 8: government debt – EA countries]. What are the implications of these developments for central banking? The state of the public finances clearly matters for central banks.
At least from a theoretical point of view, one of the reasons is that monetary policy could in principle be used – or abused – to alleviate the government’s budgetary woes. This can be done via two channels: First, the real value of nominal government debt – in particular of long-term maturity – could be at least partly inflated away via unexpected higher inflation.