International Monetary Fund research argues geopolitical fragmentation is undermining monetary fiscal coordination and may require tolerance for controlled inflation

The International Monetary Fund published an IMF Notes article in Finance & Development analysing how higher public debt, persistent inflation and intensifying geopolitical fragmentation are weakening the traditional monetary and fiscal policy mix, and arguing that safeguarding fiscal sustainability during a volatile transition may require closer policy coordination alongside moderate, temporary above-target inflation. The article links debt dynamics to “fiscal backing”, warning that monetary tightening without credible fiscal adjustment can raise real debt burdens and primary deficits, potentially creating an inflationary spiral that ultimately conflicts with price stability. It argues that supply disruptions and adverse supply shocks make coordination less effective than in demand-driven episodes, pointing to the 1970s oil shocks and post-pandemic supply chain disruptions as contexts in which policy coordination coincided with persistently high inflation. The authors describe “fiscal inflation” as potentially useful if temporary and moderate, stress the need for clear communication and measures that strengthen future growth prospects, and caution that fiscal strains and fragmentation could push governments toward trade taxes, tighter regulation, capital controls and other forms of financial repression that may increase stagflation risks, with emerging markets facing additional credibility trade-offs.