Dollar dominance, if you can keep it

Plus, the internationalisation of the euro and US May CPI

The friendly folk at Macrobond produced the following chart showing the lack of a cross-country relationship between government debt to GDP ratios, 10-year bond yields and bond yield volatility across both DM and EM economies. Fiscal relativities, as measured by debt to GDP ratios, in most cases have very little explanatory power for bond yields or yield volatility, especially for advanced economies.

This is consistent with the market monetarist point that fiscal policy is for the most part discounted by monetary policy in a regime where independent inflation targeting central banks maintain monetary dominance. While policymakers often pretend otherwise, monetary policy dominance is built into the macro frameworks of most advanced economies (see my critique of Eric Leeper in this regard). Even those economies with fixed exchange rates are in effect just outsourcing monetary policy dominance, even if gives them some short-run freedom of fiscal action.

Adam Posen made much the same point in an op-ed this week when he noted the similarity in the recent inflationary and then disinflationary experience of major economies, attributing this to the prevalence of inflation targeting regimes. As Adam suggests:

do differences in labour market institutions, fiscal paths or even labour productivity, really make no difference to monetary transmission and the persistence of inflation? That is what a lot of modern monetary theory tells us.