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In recent decades, advanced economy central banks have set monetary policy independently of fiscal authorities. Their goals were a combination of price stability and maximum sustainable employment. Today, most announce inflation targets, adjust interest rates to keep inflation low and stable, and maintain accountability by answering questions in public.

Yet, economists have long known that fiscal developments can undermine the central bank’s ability to maintain price stability. In this post, we discuss the problem of “fiscal dominance” – when fiscal policy pressures or compels a central bank to forsake its price stability objective in favor of helping to finance the public debt. While heightened levels of public debt in many advanced economies suggest that the risk of increasing fiscal dominance – and of the loss of price stability – is widespread, our focus is on U.S. developments where the threat of fiscal dominance now appears to be acute….

This post – co-authored with our friend and colleague, Richard Berner (NYU Stern School of Business) – was submitted in August 2025 as a comment to the U.S. bank regulatory agencies regarding their proposed modifications to the leverage ratio standards for U.S. global systemically important banks.

To Whom It May Concern:

We write to oppose the agencies’ proposal to alter the enhanced Supplementary Leverage Ratio (eSLR).

In our view, the proposal substantially weakens leverage, total loss-absorbing capacity, and long-term debt requirements for global systemically important banks (GSIBs). As a result, it would reduce key safeguards implemented in response to the 2008 financial crisis and add to the risks of serious financial instability and taxpayer-funded GSIB bailouts that Congress and the agencies sought to eliminate….