With the Eurozone economy weakening, many commentators are calling on the European Central Bank (ECB) to provide fresh stimulus. But what if the diverse monetary policy tools used by the ECB since the financial crisis have reached the limits of their effectiveness in promoting recovery? Could European governments contribute to stimulating the economy by increasing public spending or reducing taxes? And should fiscal policy now be focused more on raising demand by ‘loosening the public purse strings’ than on reducing public debt?
We invited our European panel of economic experts to express their views on the potential roles of fiscal and monetary policy in boosting demand and output in the Eurozone. We asked the experts whether they agreed or disagreed with the following statements, and, if so, how strongly and with what degree of confidence:
a) At this point, there is little that the European Central Bank can do to increase or maintain output in the Eurozone.
b) When the economy is operating below its potential, larger fiscal deficits are likely to increase demand and output.
c) When the economy is operating below its potential and monetary policy is at the effective lower bound, fiscal policy should prioritize increasing output over decreasing public debt.
Monetary policy effectiveness
Of our 50 experts, 42 participated in this survey. On the first statement, 4% said they had no opinion. Of the 40 who did express a view and weighted by each expert’s confidence in their response, 2% strongly agreed, 57% agreed, 14% were uncertain, 18% disagreed and 9% strongly disagreed.
In the short comments that the experts are able to include when they participate in the survey, there is an indication of what lies behind the differences of opinion. For example, Christopher Pissarides at the London School of Economics (LSE) pointed out that: ‘There is no evidence of bottlenecks in the financial sector that monetary policy could relax’; while Peter Neary at Oxford argued that: ‘The ECB can’t do much given low interest rates, but it can stop things getting worse.’
Several experts mentioned the monetary policy tools that the ECB has used or could use. Among those who think that the limits of monetary policy effectiveness are close, Charles Wyplosz at the Graduate Institute, Geneva, said: ‘A few basis points won’t make a difference and liquidity is not an issue now.’ Olivier Blanchard at the Peterson Institute noted that: ‘The ECB can buy large quantities, but with little effect on prices (so long as it keeps the capital key, and it does not buy exotic assets).’
Some who disagreed with the statement referred to what else might be done. For example, Lubos Pastor at Chicago Booth suggested: ‘There’s little room to cut rates, but ECB could also relaunch QE [quantitative easing], expand bank loans, change forward guidance. Weaker euro could help output.’ Former central bank governor Patrick Honohan at Trinity College Dublin added: ‘Still some unused powder: restart QE, remove ceiling on holdings; tilt purchases towards high yield assets, etc.’
Franklin Allen of Imperial College London, who replied that he was uncertain, commented on the ECB’s policy instruments: ‘It is probably close to the limits of what it can achieve using previous tools. But there may be new ones they can come up with.’
Karl Whelan at University College Dublin, who strongly disagreed that there is little the ECB can do, emphasized: ‘With an unemployment rate of 7.5% there is still spare capacity in the euro area. ECB can also boost investment, which increases supply capacity.’
Christian Leuz at Chicago Booth alluded to the important roles of other policy-makers in promoting economic recovery: ‘The ECB has bought countries and EU considerable time for structural reforms, but its measures also eased pressures for necessary reforms.’ And Paul De Grauwe at the LSE drew attention to the need to add fiscal stimulus to the policy mix, leading neatly on to the second and third statements: ‘We are still in a liquidity trap making it difficult for a central bank to boost the economy without fiscal stimulus.’
Fiscal policy for growth
For the second statement – on whether larger fiscal deficits are likely to increase demand when the economy is operating below capacity– 6% of the 42 experts who participated in this survey said that they had no opinion. Of the 39 who did express a view and weighted by each expert’s confidence in their response, 35% strongly agreed, 50% agreed, and 16% were uncertain.
John Van Reenen at MIT was one of several experts pointing to: ‘Lots of evidence now of the positive effect of fiscal policy at the zero lower bound.’ Christopher Pissarides exclaimed: ‘Old fashioned Keynesianism works!’
Others echoed a comment by Beatrice Weder di Mauro of the Centre for Economic Policy Research: ‘The question is how much.’ For example, Pol Antras at Harvard said: ‘Debate is largely about how much and on how to do it (increase spending and on what, cut taxes, etc.).’
But there were several caveats expressed. Although all three agreed with the statement, Per Krusell at Stockholm University noted: ‘If the government’s money isn’t wasted’; Olivier Blanchard said: ‘Unless utterly irresponsible, in which case adverse effects may dominate’; and Hélène Rey at London Business School commented: ‘Stimulate aggregate demand unless larger fiscal deficit means higher risk premium, in which case higher interest burden will decrease aggregate demand.’
Two experts who said they were uncertain also mentioned caveats. Christian Leuz pointed out that: ‘Depends also on time horizon over which outcome is considered.’ Franklin Allen added: ‘Maybe in the short run but in the long run, good investment decisions associated with innovation are likely to have more effect.’
Boosting output over reducing public debt
For the third statement – on whether fiscal policy should prioritize increasing output over decreasing public debt – 4% of the 42 experts who participated in this survey said that they had no opinion. Of the 40 who did express a view and weighted by each expert’s confidence in their response, 17% strongly agreed, 45% agreed, 34% were uncertain and 5% disagreed.
Among those who agreed with the statement, there were again caveats. Antoinette Schoar at MIT said: ‘Answer depends on the type of government projects, some crowd out private sector activity, others are net beneficial, needed infrastructure.’ Agnès Bénassy-Quéré at the Paris School of Economics commented: ‘To the extent that the government can borrow at fixed long-term rate.’ And Peter Neary observed: ‘Agree, but this is more a political/moral judgment than a scientifically grounded view. And depends on circumstances, especially size of deficit.’
Several experts remarked on the debt position of countries choosing to make growth a priority over debt reduction. Xavier Freixas at the Universitat Pompeu Fabra said: ‘It depends upon the existing level of public debt and its impact on sovereign risk.’ Karl Whelan commented: ‘Generally true though not, for example, in highly indebted members of the euro area which do not have control of their own currency.’
Charles Wyplosz was not so convinced about the importance of current debt levels: ‘Fiscal space is determined by policy institutions, more than the existing gross debt: fiscal councils; central bank lending in last resort.’
Of those who disagreed with the statement, Jan Pieter Krahnen of Goethe University Frankfurt explained: ‘I disagree because of unconditional nature of the statement. What if Ricardian equivalence holds, and investment function bends backwards?’
All comments made by the experts are in the full survey results.
Romesh Vaitilingam
@econromesh
July 2019
Question A:
At this point, there is little that the European Central Bank can do to increase or maintain output in the Eurozone.
Responses
Responses weighted by each expert's confidence
Question B:
When the economy is operating below its potential, larger fiscal deficits are likely to increase demand and output.
Responses
Responses weighted by each expert's confidence
Question C:
When the economy is operating below its potential and monetary policy is at the effective lower bound, fiscal policy should prioritize increasing output over decreasing public debt.
Responses
Responses weighted by each expert's confidence
Question A Participant Responses
Participant | University | Vote | Confidence | Bio/Vote History |
---|---|---|---|---|
Franklin Allen |
Imperial College London | Bio/Vote History | ||
It is probably close to the limits of what it can achieve using previous tools. But there may be new ones they can come up with.
|
||||
Pol Antras |
Harvard | Bio/Vote History | ||
|
||||
Timothy J. Besley |
LSE | Did Not Answer | Bio/Vote History | |
|
||||
Olivier Blanchard |
Peterson Institute | Bio/Vote History | ||
The ECB can buy large quantities, but with little effect on prices. (so long as it keeps the capital key, and it does not buy exotic assets)
|
||||
Nicholas Bloom |
Stanford | Bio/Vote History | ||
|
||||
Richard William Blundell |
University College London | Bio/Vote History | ||
|
||||
Agnès Bénassy-Quéré |
Paris School of Economics | Bio/Vote History | ||
|
||||
Elena Carletti |
Bocconi | Bio/Vote History | ||
|
||||
Jean-Pierre Danthine |
Paris School of Economics | Bio/Vote History | ||
|
||||
Paul De Grauwe |
LSE | Bio/Vote History | ||
We are still in a liquidity trap making it difficult for a central bank to boost the economy without fiscal stimulus
|
||||
Jan Eeckhout |
UPF Barcelona | Bio/Vote History | ||
|
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Ernst Fehr |
Universität Zurich | Bio/Vote History | ||
|
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Xavier Freixas |
Barcelona GSE | Bio/Vote History | ||
|
||||
Nicola Fuchs-Schündeln |
Goethe-Universität Frankfurt | Did Not Answer | Bio/Vote History | |
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||||
Jordi Galí |
Barcelona GSE | Bio/Vote History | ||
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||||
Luis Garicano |
LSE | Did Not Answer | Bio/Vote History | |
|
||||
Francesco Giavazzi |
Bocconi | Bio/Vote History | ||
|
||||
Rachel Griffith |
University of Manchester | Bio/Vote History | ||
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Veronica Guerrieri |
Chicago Booth | Bio/Vote History | ||
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||||
Luigi Guiso |
Einaudi Institute for Economics and Finance | Bio/Vote History | ||
|
||||
Patrick Honohan |
Trinity College Dublin | Bio/Vote History | ||
Still some unused powder: Restart QE; remove ceiling on holdings; tilt purchases towards high yield assets, etc.
|
||||
Beata Javorcik |
University of Oxford | Bio/Vote History | ||
|
||||
Henrik Kleven |
Princeton | Did Not Answer | Bio/Vote History | |
|
||||
Jan Pieter Krahnen |
Goethe University Frankfurt | Bio/Vote History | ||
The ECB can influence output via interest rates if and only if the investment function is monotonic everywhere. But this may not be true.
|
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Per Krusell |
Stockholm University | Bio/Vote History | ||
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Botond Kőszegi |
Central European University | Bio/Vote History | ||
|
||||
Eliana La Ferrara |
Harvard Kennedy | Did Not Answer | Bio/Vote History | |
|
||||
Christian Leuz |
Chicago Booth | Bio/Vote History | ||
The ECB has bought countries and EU considerable time for structural reforms, but its measures also eased pressures for necessary reforms.
|
||||
Thierry Mayer |
Sciences-Po | Did Not Answer | Bio/Vote History | |
|
||||
Costas Meghir |
Yale | Did Not Answer | Bio/Vote History | |
|
||||
Peter Neary |
Oxford | Bio/Vote History | ||
ECB can’t do much given low interest rates, but I can stop things getting worse
|
||||
Kevin O'Rourke |
Oxford | Bio/Vote History | ||
|
||||
Marco Pagano |
Università di Napoli Federico II | Bio/Vote History | ||
|
||||
Lubos Pastor |
Chicago Booth | Bio/Vote History | ||
There's little room to cut rates, but ECB could also relaunch QE, expand bank loans, change forward guidance. Weaker euro could help output.
|
||||
Torsten Persson |
Stockholm University | Did Not Answer | Bio/Vote History | |
|
||||
Christopher Pissarides |
London School of Economics and Political Science | Bio/Vote History | ||
There is no evidence of bottlenecks in the financial sector that monetary policy could relax
|
||||
Richard Portes |
London Business School | Bio/Vote History | ||
|
||||
Canice Prendergast |
Chicago Booth | Bio/Vote History | ||
|
||||
Lucrezia Reichlin |
London Business School | Bio/Vote History | ||
|
||||
Rafael Repullo |
CEMFI | Bio/Vote History | ||
|
||||
Hélène Rey |
London Business School | Bio/Vote History | ||
Has to prevent fall in inflationary expectations
|
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Antoinette Schoar |
MIT | Bio/Vote History | ||
|
||||
Daniel Sturm |
London School of Economics | Bio/Vote History | ||
|
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John Van Reenen |
LSE | Bio/Vote History | ||
|
||||
John Vickers |
Oxford | Bio/Vote History | ||
|
||||
Hans-Joachim Voth |
University of Zurich | Bio/Vote History | ||
|
||||
Beatrice Weder di Mauro |
The Graduate Institute, Geneva | Bio/Vote History | ||
Not much much with the existing toolkit
|
||||
Karl Whelan |
University College Dublin | Bio/Vote History | ||
With an unemployment rate of 7.5% there is still spare capacity in the EA. ECB can also boost investment which increases supply capacity.
|
||||
Charles Wyplosz |
The Graduate Institute Geneva | Bio/Vote History | ||
A few basis points won't make a difference and liquidity is not an issue now.
|
||||
Fabrizio Zilibotti |
Yale University | Bio/Vote History | ||
|
Question B Participant Responses
Participant | University | Vote | Confidence | Bio/Vote History |
---|---|---|---|---|
Franklin Allen |
Imperial College London | Bio/Vote History | ||
Maybe in the short run but in the long run good investment decisions associated with innovation are likely to have more effect.
|
||||
Pol Antras |
Harvard | Bio/Vote History | ||
Debate is largely about how much and on how to do it (increase spending and on what, cut taxes, etc.)
|
||||
Timothy J. Besley |
LSE | Did Not Answer | Bio/Vote History | |
|
||||
Olivier Blanchard |
Peterson Institute | Bio/Vote History | ||
Unless utterly irresponsible, in which case adverse effects may dominate
|
||||
Nicholas Bloom |
Stanford | Bio/Vote History | ||
|
||||
Richard William Blundell |
University College London | Bio/Vote History | ||
|
||||
Agnès Bénassy-Quéré |
Paris School of Economics | Bio/Vote History | ||
The problem is to calculate the potential.
|
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Elena Carletti |
Bocconi | Bio/Vote History | ||
|
||||
Jean-Pierre Danthine |
Paris School of Economics | Bio/Vote History | ||
|
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Paul De Grauwe |
LSE | Bio/Vote History | ||
|
||||
Jan Eeckhout |
UPF Barcelona | Bio/Vote History | ||
|
||||
Ernst Fehr |
Universität Zurich | Bio/Vote History | ||
|
||||
Xavier Freixas |
Barcelona GSE | Bio/Vote History | ||
|
||||
Nicola Fuchs-Schündeln |
Goethe-Universität Frankfurt | Did Not Answer | Bio/Vote History | |
|
||||
Jordi Galí |
Barcelona GSE | Bio/Vote History | ||
|
||||
Luis Garicano |
LSE | Did Not Answer | Bio/Vote History | |
|
||||
Francesco Giavazzi |
Bocconi | Bio/Vote History | ||
|
||||
Rachel Griffith |
University of Manchester | Bio/Vote History | ||
|
||||
Veronica Guerrieri |
Chicago Booth | Bio/Vote History | ||
|
||||
Luigi Guiso |
Einaudi Institute for Economics and Finance | Bio/Vote History | ||
|
||||
Patrick Honohan |
Trinity College Dublin | Bio/Vote History | ||
|
||||
Beata Javorcik |
University of Oxford | Bio/Vote History | ||
|
||||
Henrik Kleven |
Princeton | Did Not Answer | Bio/Vote History | |
|
||||
Jan Pieter Krahnen |
Goethe University Frankfurt | Bio/Vote History | ||
There are two caveats in the statement: first, output is below potential, and second, Ricardian equivalence does not hold.
|
||||
Per Krusell |
Stockholm University | Bio/Vote History | ||
If the government’s money isn’t wasted.
|
||||
Botond Kőszegi |
Central European University | Bio/Vote History | ||
|
||||
Eliana La Ferrara |
Harvard Kennedy | Did Not Answer | Bio/Vote History | |
|
||||
Christian Leuz |
Chicago Booth | Bio/Vote History | ||
Depends also on time horizon over which outcome is considered.
|
||||
Thierry Mayer |
Sciences-Po | Did Not Answer | Bio/Vote History | |
|
||||
Costas Meghir |
Yale | Did Not Answer | Bio/Vote History | |
|
||||
Peter Neary |
Oxford | Bio/Vote History | ||
Only models with implausible degrees of wage/price flexibility predict otherwise.
|
||||
Kevin O'Rourke |
Oxford | Bio/Vote History | ||
|
||||
Marco Pagano |
Università di Napoli Federico II | Bio/Vote History | ||
|
||||
Lubos Pastor |
Chicago Booth | Bio/Vote History | ||
|
||||
Torsten Persson |
Stockholm University | Did Not Answer | Bio/Vote History | |
|
||||
Christopher Pissarides |
London School of Economics and Political Science | Bio/Vote History | ||
Old fashioned Keynesianism works!
|
||||
Richard Portes |
London Business School | Bio/Vote History | ||
|
||||
Canice Prendergast |
Chicago Booth | Bio/Vote History | ||
|
||||
Lucrezia Reichlin |
London Business School | Bio/Vote History | ||
|
||||
Rafael Repullo |
CEMFI | Bio/Vote History | ||
|
||||
Hélène Rey |
London Business School | Bio/Vote History | ||
Stimulate aggregate demand unless larger fiscal deficit mean higher risk premium in which case higher interest burden will decrease AD
|
||||
Antoinette Schoar |
MIT | Bio/Vote History | ||
|
||||
Daniel Sturm |
London School of Economics | Bio/Vote History | ||
|
||||
John Van Reenen |
LSE | Bio/Vote History | ||
Lots of evidence now of the positive effect fiscal policy at zero lower bound
|
||||
John Vickers |
Oxford | Bio/Vote History | ||
|
||||
Hans-Joachim Voth |
University of Zurich | Bio/Vote History | ||
|
||||
Beatrice Weder di Mauro |
The Graduate Institute, Geneva | Bio/Vote History | ||
The question is how much.
|
||||
Karl Whelan |
University College Dublin | Bio/Vote History | ||
There is plenty of empirical evidence for this proposition.
|
||||
Charles Wyplosz |
The Graduate Institute Geneva | Bio/Vote History | ||
The literature is now wide and converging.
|
||||
Fabrizio Zilibotti |
Yale University | Bio/Vote History | ||
|
Question C Participant Responses
Participant | University | Vote | Confidence | Bio/Vote History |
---|---|---|---|---|
Franklin Allen |
Imperial College London | Bio/Vote History | ||
It depends on the circumstances of the country. If it is not very indebted and public investment would be beneficial then it makes sense.
|
||||
Pol Antras |
Harvard | Bio/Vote History | ||
|
||||
Timothy J. Besley |
LSE | Did Not Answer | Bio/Vote History | |
|
||||
Olivier Blanchard |
Peterson Institute | Bio/Vote History | ||
costs of debt small. (output) benefits of deficits large
|
||||
Nicholas Bloom |
Stanford | Bio/Vote History | ||
|
||||
Richard William Blundell |
University College London | Bio/Vote History | ||
|
||||
Agnès Bénassy-Quéré |
Paris School of Economics | Bio/Vote History | ||
To the extent that the government can borrow at fixed long term rate
|
||||
Elena Carletti |
Bocconi | Bio/Vote History | ||
|
||||
Jean-Pierre Danthine |
Paris School of Economics | Bio/Vote History | ||
|
||||
Paul De Grauwe |
LSE | Bio/Vote History | ||
|
||||
Jan Eeckhout |
UPF Barcelona | Bio/Vote History | ||
|
||||
Ernst Fehr |
Universität Zurich | Bio/Vote History | ||
|
||||
Xavier Freixas |
Barcelona GSE | Bio/Vote History | ||
It depends upon the existing level of public debt and its impact on sovereign risk.
|
||||
Nicola Fuchs-Schündeln |
Goethe-Universität Frankfurt | Did Not Answer | Bio/Vote History | |
|
||||
Jordi Galí |
Barcelona GSE | Bio/Vote History | ||
|
||||
Luis Garicano |
LSE | Did Not Answer | Bio/Vote History | |
|
||||
Francesco Giavazzi |
Bocconi | Bio/Vote History | ||
|
||||
Rachel Griffith |
University of Manchester | Bio/Vote History | ||
|
||||
Veronica Guerrieri |
Chicago Booth | Bio/Vote History | ||
|
||||
Luigi Guiso |
Einaudi Institute for Economics and Finance | Bio/Vote History | ||
|
||||
Patrick Honohan |
Trinity College Dublin | Bio/Vote History | ||
|
||||
Beata Javorcik |
University of Oxford | Bio/Vote History | ||
|
||||
Henrik Kleven |
Princeton | Did Not Answer | Bio/Vote History | |
|
||||
Jan Pieter Krahnen |
Goethe University Frankfurt | Bio/Vote History | ||
I disagree because of unconditional nature of the statement. What if Ricardian equivalence holds, and investment function bends backwards?
|
||||
Per Krusell |
Stockholm University | Bio/Vote History | ||
Ok if debt position is not in danger zone.
|
||||
Botond Kőszegi |
Central European University | Bio/Vote History | ||
|
||||
Eliana La Ferrara |
Harvard Kennedy | Did Not Answer | Bio/Vote History | |
|
||||
Christian Leuz |
Chicago Booth | Bio/Vote History | ||
|
||||
Thierry Mayer |
Sciences-Po | Did Not Answer | Bio/Vote History | |
|
||||
Costas Meghir |
Yale | Did Not Answer | Bio/Vote History | |
|
||||
Peter Neary |
Oxford | Bio/Vote History | ||
Agree, but this is more a political/moral judgement than a scientifically grounded view. And depends on circumstances, esp. size of deficit
|
||||
Kevin O'Rourke |
Oxford | Bio/Vote History | ||
|
||||
Marco Pagano |
Università di Napoli Federico II | Bio/Vote History | ||
|
||||
Lubos Pastor |
Chicago Booth | Bio/Vote History | ||
|
||||
Torsten Persson |
Stockholm University | Did Not Answer | Bio/Vote History | |
|
||||
Christopher Pissarides |
London School of Economics and Political Science | Bio/Vote History | ||
The only potential problem I see is that confidence in the country might fall and affect investment otherwise I would say strongly agree
|
||||
Richard Portes |
London Business School | Bio/Vote History | ||
|
||||
Canice Prendergast |
Chicago Booth | Bio/Vote History | ||
|
||||
Lucrezia Reichlin |
London Business School | Bio/Vote History | ||
|
||||
Rafael Repullo |
CEMFI | Bio/Vote History | ||
it depends on the level of public debt.
|
||||
Hélène Rey |
London Business School | Bio/Vote History | ||
It depends on the country. At high debt level risk premium increase can more than undo aggregate demand stimulus
|
||||
Antoinette Schoar |
MIT | Bio/Vote History | ||
Answer depends on the type of government projects, some crowd out private sector activity others are net beneficial, needed infrastructure
|
||||
Daniel Sturm |
London School of Economics | Bio/Vote History | ||
|
||||
John Van Reenen |
LSE | Bio/Vote History | ||
|
||||
John Vickers |
Oxford | Bio/Vote History | ||
Yes if fiscal position is sound but not necessarily otherwise
|
||||
Hans-Joachim Voth |
University of Zurich | Bio/Vote History | ||
|
||||
Beatrice Weder di Mauro |
The Graduate Institute, Geneva | Bio/Vote History | ||
Depends on the debt level
|
||||
Karl Whelan |
University College Dublin | Bio/Vote History | ||
Generally true though not, for example, in highly-indebted members of the Euro Area which do not have control of their own currency.
|
||||
Charles Wyplosz |
The Graduate Institute Geneva | Bio/Vote History | ||
Fiscal space is determined by policy institutions, more than the existing gross debt: fiscal councils central bank lending in last resort.
|
||||
Fabrizio Zilibotti |
Yale University | Bio/Vote History | ||
|