With growth still weaker than is desirable and challenges originating from geopolitical developments further complicating the economic outlook, responsible growth-friendly fiscal policy needs to play a bigger role in supporting demand in the Eurozone today. This column presents a new European Commission Communication on Eurozone fiscal policy, which outlines what a “positive fiscal stance" for the Eurozone would look like.
Marco Buti, Lucía Rodríguez Muñoz, 28 November 2016
Marco Buti, Helene Bohn-Jespersen, 25 November 2016
The actions taken in 2008-09 by the G20 avoided an outright depression during the financial crisis, but questions remain over its ability to evolve from a short-term crisis response forum to effectively addressing more long-term challenges. This column argues that to ‘win the peace', G20 members as well as G20 Presidencies have to redesign international economic policy coordination, and ensure that the focus is kept on a limited number of deliverables to which all G20 members can agree.
Luca Dedola, Luc Laeven, 15 November 2016
In September 2016, the ECB held its first Annual Research Conference. This column surveys the contributions to the conference, which brought together policymakers and academics from around the world to promote discussion of topics at the forefront of monetary and financial economic research. Nobel laureate Eric Maskin gave the keynote lecture, addressing whether fiscal policy should be set by politicians, and the conference included eight further presentations and a panel discussion on monetary policy and financial stability.
Jason Furman, 02 November 2016
The landscape of the fiscal policy debate has changed over the past decade, with academics and international organisations moving away from an ‘Old View’ of fiscal policy as ineffective. This column uses examples from the US and Europe to highlight the five principles of a ‘New View’ of fiscal policy, which increasingly appreciates that expansionary fiscal policy is effective in a world of persistently low interest rates, low growth, and strong international linkages.
Igor Masten, Ana Grdović Gnip, 13 October 2016
Fiscal policies in European Economic and Monetary Union states are being reinforced. This column argues that the cyclically adjusted budget balance will be an imprecise tool for measuring fiscal discipline, and structural deficit rules limits are too stringent. If the official methodology is used to trigger corrective fiscal contractions, it may increase macroeconomic instability.
Stephen Cecchetti, Kim Schoenholtz, 19 August 2016
Helicopter money is not just another version of unconventional monetary policy. Using simple central bank and government balance sheets, this column explains how helicopter money today is different from what Milton Friedman imagined back in 1969 – it is expansionary fiscal policy financed by central bank money.
Raju Huidrom, M Ayhan Kose, Franziska Ohnsorge, 13 August 2016
Fiscal multipliers tend to be larger when the fiscal position of governments is stronger. This column argues that the link between fiscal multipliers and fiscal positions is independent of the business cycle. Although multipliers are generally larger in recessions, they are smaller during times of high debt, even during recessions, relative to what they would be if government debt were lower.
Peter Egger, Sergey Nigai, Nora Strecker, 21 May 2016
Increased globalisation since the mid-1990s has eroded some of the tax bases of many economies. At the same time, demand for public goods has risen and governments face the challenge of financing greater public expenditure with lower tax revenues. This column discusses tax policy responses to increasing globalisation, showing that since the mid-1990s governments in OECD countries have increasingly relied on revenues from employee-borne rather than firm-borne taxes. Due to the greater mobility of capital and high-skilled workers, who are able to escape higher taxes more easily, the middle classes have carried much of the additional tax burden.
Roel Beetsma, Xavier Debrun, 16 May 2016
The success of independent central banks is often used to argue in favour of independent fiscal councils with the aim of promoting sound fiscal policies. But unlike central banks, fiscal councils have no policy levers to pull – they can bark but never bite. This column explores the theoretical foundations and practical implications of fiscal councils. The evidence suggests that independent councils can mitigate the deficit bias. They do this by subjecting the ‘fiscal alchemy’ to systematic, rigorous, and highly publicised scrutiny.
Barry Eichengreen, Poonam Gupta, 13 May 2016
The recent reversal of capital flows to emerging markets has pointed to the continuing relevance of the sudden stop problem. This column analyses the sudden stops in capital flows to emerging markets since 1991. It shows that the frequency and duration of sudden stops have remained largely unchanged, but that global factors have become more important in their incidence. Stronger macroeconomic and financial frameworks have allowed policymakers to respond more flexibly, but these more flexible responses have not guaranteed insulation or significantly mitigated the impact.
Jason Furman, Jay Shambaugh, 29 April 2016
In terms of GDP and unemployment, the US’s recovery from the crisis was relatively rapid. This was in large part due to forceful fiscal policy conducted by the Obama Administration. This column surveys the lessons for other economies, which have seen less-convincing recoveries. Around the world, increased spending and tax cuts over the last eight years have had positive effects. Continuing recovery will require concerted action in these directions.
Francesco D'Acunto, Daniel Hoang, Michael Weber, 27 April 2016
The Eurozone faces zero inflation paired with low economic growth. With monetary policy hobbled by the zero lower bound, it is time to think more broadly. This column discusses the theoretical and empirical evidence on ‘unconventional fiscal policy’. Such policies aim to increase growth and inflation in a budget-neutral fashion, while keeping the tax burden on households constant.
Willem Pieter De Groen, Daniel Gros, Diego Valiante, 15 April 2016
The ECB recently announced a new monetary operation – targeted longer-term refinancing operations, or TLTRO II – that essentially subsidises bank loans to the real economy. This column argues that this ‘cash for loans’ scheme, which might cost up to €24 billion, is unlikely to affect the real economy greatly. This is because banks can easily window dress their loans to qualify. TLTRO II also tests the limits of the ECB’s mandate by stepping into the fiscal policy space.
Sagiri agiri Kitao, 15 April 2016
Most countries with a generous pay-as-you-go social security system and ageing demographics will need to implement significant welfare reform, such as a major cut in benefits or a significant increase in distortionary taxation. Individuals’ uncertainty about when such a policy change will occur will cause precautionary saving and changes in factor prices, affecting aggregate welfare. This column uses evidence from Japan to show that delaying welfare reform will benefit the elderly, at a long-lasting cost to the young.
Carlos Vegh, Guillermo Vuletin, 24 February 2016
By the end of 2013, growth in Latin America had begun to decelerate. The ensuing policy responses to this have differed across countries. This column uses data from the past 40 years to analyse policy responses to economic distress in the region. On average, countercyclical policy responses to crises have been more common over the last 15 years than previously. Latin America thus appears to have graduated in terms of monetary and fiscal responses to crises. But there is still a great deal of heterogeneity across countries in the region, and they must continue to build sound and credible fiscal and monetary institutions.
Tommaso Monacelli, 12 February 2016
The boom-bust cycle in the Eurozone between 2000 and 2008 is essentially a story of cyclical asymmetries between the Core and the Periphery. While stressing the importance of addressing these asymmetries – especially via fiscal policy – the ECB has failed to take them explicitly into account in its own policy-setting. This essay argues that these asymmetries may persist precisely because they are not a central target of stabilisation policy – both fiscal and monetary.
Giancarlo Corsetti, Matthew Higgins, Paolo Pesenti, 12 February 2016
James Tobin’s classic ‘funnel’ theory questioned how best to calibrate the overall stance of macroeconomic policy in an economic region. This column revisits key questions that emerged out of the EZ crisis through the lens of Tobin’s theory. A key insight is that monetary policy cannot achieve stabilisation objectives without stronger mechanisms for fiscal burden-sharing and risk-pooling. Although short-run solutions are possible under the existing circumstances, long-run stability will require a policy mix that convincingly deals with the issue of fiscal risk-sharing.
Barry Eichengreen, Charles Wyplosz, 14 March 2016
The Eurozone crisis has shown that monetary union entails more than just sharing monetary policies. This column, first published on 12 February 2016, identifies four minimal conditions for solidifying the monetary union. In the case of fiscal policy, this means a decentralised solution. In the case of financial supervision and monetary policy, centralisation is unambiguously the appropriate response. In the case of a fourth condition, debt restructuring, either approach is possible, but the authors prefer a solution that involves centrally restructuring debts while allocating costs at national level.
M Ayhan Kose, Franziska Ohnsorge, Lei (Sandy) Ye, 07 January 2016
Emerging markets face their fifth consecutive year of slowing growth. This column examines the nature of the slowdown and appropriate policy responses. Repeated downgrades in long-term growth expectations suggest that the slowdown might not be simply a pause, but the beginning of an era of weak growth for emerging markets. The countries concerned urgently need to put in place policies to address their cyclical and structural challenges and promote growth.
Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan, 23 December 2015
In November, the Chancellor of the Exchequer unveiled plans for debt reduction in the UK over the rest of this Parliament. This column compiles the views of several experts on these plans, taken from a Centre for Macroeconomics survey. A significant number of respondents felt that the plans for debt reduction were not appropriate. There were also widespread doubts that the Chancellor’s Charter for Budgetary Responsibility would help underpin the credibility of fiscal policy.