Global outlook c h a p t e r 1

FIGURE 1.18 
Monetary and financial policies in 
advanced economies
Policy rates in major advanced economies are expected to remain near 
zero for several years as central banks support a protracted recovery. 
Market-based measures of inflation expectations have bounced back from 
their second-quarter lows, partly aided by shifts in policy regimes.
Sources
: Bloomberg; World Bank.

A. Figure shows the expectations for policy rates for the euro area, Japan, and the United States 

obtained from Overnight Index Swaps (OIS) as of December 16, 2020. 
B. Figure shows seven-year inflation swap rates for the euro area, Japan, and the United States. The 
last observation is December 16, 2020. The idiosyncratic increase from September 21 to September 
22 (inclusive) was removed.
Click here to download data and charts.
 
A. Market-based interest rate 
expectations 
B. Inflation expectations

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macroeconomic stabilization during the crisis, 
delivering unprecedented stimulus in 2020 in the 
form of cash transfers and income support to 
households and firms. Fiscal support is projected 
to be withdrawn more rapidly than was the case 
following the global financial crisis in more than 
90 percent of advanced economies (figure 1.19.A). 
With most economies still far from potential, 
some further fiscal support may be needed to 
buttress disposable incomes and avoid derailing 
the fragile recovery (figure 1.19.B; Casado et al. 
2020; IMF 2020c; Stone 2020).
Fiscal multipliers are high when unemployment 
rates are rising (Auerbach and Gorodnichenko 
2015; Berge, De Ridder, and Pfajfar 2020). Policy 
makers could consider enhancing automatic 
stabilizers—for instance, by permanently adopting 
short-time work programs—to quicken the 
delivery and maximize the effectiveness of fiscal 
support. As fiscal authorities gradually refocus 
their attention on boosting a lasting recovery, 
spending can be reprioritized to areas with high 
long-term fiscal multipliers, including investments 
in infrastructure and public education (De Ridder, 
Hannon and Pfajfar 2020; Ramey 2020). For 
instance, one priority could be reversing the trend 
decline in infrastructure spending as a share of 
GDP experienced by more than two-thirds of 
advanced economies, with an emphasis on green 
infrastructure projects and other investments that 
can boost resilience to climate risks (figure 1.19.C; 
OECD 2020b; Vivid Economics 2020). Whereas 
debt dynamics remain manageable in the near 
term despite large increases in debt levels, credible 
fiscal plans can help strengthen expectations of 
long-run fiscal sustainability (figure 1.19.D).