Uncoordinated monetary and fiscal policy is weakening our ability to protect people from inflation and to secure the transition to a green economy. This disconnect doesn’t just weaken inflation responses, it risks locking in social hardship and delaying action on climate at the precise moment when coordinated, strategic intervention is most needed.
Failing to make the investments required for economic and environmental resilience ultimately undermines the very goal of long-term price stability.
When economies reopened after the Covid-19 lockdowns, supply chains had not fully recovered. Firms struggled to meet surging demand amid shortages of labour, materials and energy. Then Russia’s invasion of Ukraine disrupted global energy markets, especially in Europe.
Climate breakdown added further strain, worsening harvests and triggering food price spikes. These cascading shocks drove prices higher, not because demand was too high but because supply was too fragile. As Isabella Weber and Evan Wasner describe, these shocks also create opportunities where sellers can increase their monopoly power and raise prices, so-called greedflation.
Despite all this, central banks persisted with monetary tightening, often without clearly explaining how it would fix supply-side failures. The assumption seemed to be that inflation expectations needed “anchoring”, but raising borrowing costs did not improve harvests, unlock shipping routes, expand clean energy production or combat price-gouging firms.
The argument that central banks are neutral actors is increasingly untenable. Interest rate decisions, asset purchases and lending frameworks all have significant distributional impacts. These policies shape who gets credit, which sectors grow and whose livelihoods are protected. Therefore if monetary policy is already political in effect, then it must be guided by democratic priorities.
Rethinking monetary and fiscal policy
We need to rethink what we mean by price stability. The current frameworks prioritise short-term inflation targets while sidelining the deeper drivers of economic volatility. In a world increasingly shaped by climate shocks, volatile energy prices and fragile supply chains, central banks must interpret their primary mandate – maintaining price and financial stability – with a longer-term perspective.
This also requires taking secondary objectives – such as full employment, sustainable growth and the transition to net zero – more seriously. These are not distractions from price stability; they are crucial to achieving it in the long-term.
One of the clearest examples of why coordination matters lies in the cost of capital for green investment. Net-zero infrastructure is capital intensive, requiring large upfront investments in return for long-term savings and resilience. But in the current monetary environment, high interest rates and policy uncertainty are making these investments more expensive and less attractive. The UK’s Climate Change Committee, which advises the government on progress towards net-zero target, has said the cost of capital could account for over 30% of total net-zero investment in an unstable policy context.
Without strong and consistent policy signals, such as providing cheaper credit to mission critical infrastructure, the cost of capital for renewable projects makes the transition more expensive. This is not only a barrier to decarbonisation but a threat to energy security and price stability as clean power offers a crucial route away from volatile fossil fuel markets.
Closer coordination between governments and central banks is essential, not only to manage both short- and long-term inflation but also to enable the scale of public and private investment required in the years ahead.
Different inflationary scenarios require different combinations of fiscal and monetary tools. Coordinated responses tailored to the underlying cause of inflation can reduce the overreliance on interest rates and deliver more effective outcomes.
In some cases, this will mean governments taking a democratic view on which prices – such as food, energy or housing – are most important to shield, with central banks supporting these decisions through targeted interventions.
For example, the central banks of China and Japan both have green interest rate schemes which offer cheaper lending to green projects, helping to lower the cost of capital and therefore the prices of these products.
This approach also enables governments to pursue long-term strategies such as investing in universal basic services which not only protect households from price shocks but also help central banks deliver on their own mandates by creating more stable economic foundations.
New models for a new era
We need to face up to the limited impact of unconventional monetary policy tools like quantitative easing, which have often failed to stimulate broad-based economic activity or reach those most in need. Instead, there should be more strategic measures – such as green credit guidance, sector-specific support, and public investment in low-carbon infrastructure – that could directly improve people’s lives and build resilience to future shocks.
Central banks must also shed their aversion to monetary financing of government policies, provided it is used transparently and in coordination with fiscal authorities to meet shared objectives.
To make this kind of coordination effective and legitimate, new governance arrangements are needed. These must safeguard central bank independence in its narrow sense – protection from short-term political interference – while recognising that decisions over which prices to protect, where to direct credit and how to respond to systemic shocks are inherently political.
We propose establishing an economic coordination council composed of a range of fiscal, monetary and banking experts to provide recommendations on how to achieve policy coordination, for example, by identifying contradictory policies and which policy instruments could be deployed to enhance coordination. This idea is applicable in both the UK and the EU.
This approach would not change central bank independence but rather create institutional pathways for aligning fiscal and monetary strategies in the public interest. By embedding transparency, accountability and shared purpose into the governance of macroeconomic policy, we can equip our institutions to meet today’s challenges.
The climate crisis and geopolitical instability is not a future threat; it is a present reality reshaping the economic landscape. If our macroeconomic institutions continue to act in isolation, they will fail on their core mandates, let alone unlock the opportunities of a fair and green transition.
Sebastian Mang and Dominic Caddick are co-authors of How Do You Solve a Problem Like Inflation: The Case for Monetary-Fiscal Coordination.
This page was last updated May 8, 2025
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Sebastian Mang is a political economist and leads the New Economics Foundation’s work on EU economic policy, with a particular focus on public finance and macroeconomics. He previously worked at Greenpeace on climate and energy issues and as a policy advisor for a Green MEP on legislation, including the European climate law and the emissions trading system.
Dominic Caddick is an economist specialising in fiscal and monetary policy across the UK and EU, with a focus on enabling investment in climate action and social justice. He has also worked on social security and energy policy at the New Economics Foundation, and previously worked at the UK's Department for Business, Energy and Industrial Strategy.
