This paper aims to summarise why the primary method used to stimulate economies is changing from a monetary to fiscal approach. It considers the implications of this environment for an important part of a pension scheme’s strategy, its liability hedging, and concludes that inflation linked liabilities are riskiest in this environment.

The limit of monetary policy alone has been reached

Simple monetary policy (controlling interest rates) has now run its course in the developed world. Quantitative easing (through monetisation whereby governments are borrowing from their central bank) has been huge and has led nominal interest rates near their effective lower bound (around zero) even for long maturities. While this has supported asset prices and made credit available, it had limited impact on supporting demand from the real economy.