Debt levels depend on fiscal and monetary policy mix: Poloz

Poloz says more government spending and higher interest rates lead to lower private-sector debt—and higher public debt

OTTAWA – Private and public debt loads are closely influenced by the mixture of how much the government spends and the level of monetary policy, such as the key interest rate, Bank of Canada governor Stephen Poloz said Saturday.

In prepared remarks of his lecture at the University of Ottawa, Poloz said the optimal combination of monetary and fiscal approaches varies depending on the economic situation.

His lecture came as many countries around the world adjust their fiscal and monetary policy mixes in the hope of boosting stagnant economic growth.

The Trudeau government has shifted gears in recent months to seek deficit-fuelled growth by committing billions more dollars toward economy-enhancing investments such as infrastructure.

In his lecture, Poloz said a Bank of Canada model shows the combination of more government spending and higher interest rates leads to lower private-sector debt and higher public debt.

If the policy levels are reversed then private debt would climb and government debt would slide, he added.

“In effect, for a given macroeconomic situation, policy-makers have the ability to choose the dynamics of those two debt stocks,” Poloz said.

“They can’t influence the two debt stocks independently, but their policy choices have simultaneous implications for both variables.”

Poloz stressed that finding the right balance is complex for policy-makers since high levels of private and public debt can both create financial stability concerns in an economy.

“As for the desirability of one policy mix over another, hindsight is always 20-20 and such a discussion would have little meaning here,” he added.

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