What Really Brought Down Truss?
Liz Truss’s swift fall from power appears to have resulted from a clash between what economists call fiscal dominance (the government’s spending promises) and monetary dominance (the central bank’s price-stability mandate). But thinking about what happened to Truss in these terms misses an important and surprising part of the story.
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PRINCETON – The resignation of Liz Truss, the United Kingdom’s shortest-serving prime minister, completes a powerful case study of how not to make fiscal policy. But the lesson goes deeper than the idea that British politics was torn apart by a traumatic struggle pitting the government and the Treasury against the Bank of England. The real failure was overlooking major risks built long ago into the plumbing of the financial system.