European Fiscal and Monetary Policy

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 Participant Responses

Participant	University	Vote	Confidence	Bio/Vote History
Franklin Allen	Imperial College London	Uncertain	5	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	Uncertain	5	Bio/Vote History
Timothy J. Besley	LSE	Did Not Answer		Bio/Vote History
Olivier Blanchard	Peterson Institute	Agree	9	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	Disagree	7	Bio/Vote History
Richard William Blundell	University College London	Uncertain	2	Bio/Vote History
Agnès Bénassy-Quéré	Paris School of Economics	Agree	4	Bio/Vote History
Elena Carletti	Bocconi	Uncertain	4	Bio/Vote History
Jean-Pierre Danthine	Paris School of Economics	Agree	9	Bio/Vote History
Paul De Grauwe	LSE	Agree	7	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	Agree	6	Bio/Vote History
Ernst Fehr	Universität Zurich	Agree	8	Bio/Vote History
Xavier Freixas	Barcelona GSE	Strongly Agree	6	Bio/Vote History
Nicola Fuchs-Schündeln	Goethe-Universität Frankfurt	Did Not Answer		Bio/Vote History
Jordi Galí	Barcelona GSE	Agree	8	Bio/Vote History
Luis Garicano	LSE	Did Not Answer		Bio/Vote History
Francesco Giavazzi	Bocconi	Uncertain	10	Bio/Vote History
Rachel Griffith	University of Manchester	No Opinion		Bio/Vote History
Veronica Guerrieri	Chicago Booth	Uncertain	8	Bio/Vote History
Luigi Guiso	Einaudi Institute for Economics and Finance	Agree	8	Bio/Vote History
Patrick Honohan	Trinity College Dublin	Disagree	10	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	Uncertain	3	Bio/Vote History
Henrik Kleven	Princeton	Did Not Answer		Bio/Vote History
Jan Pieter Krahnen	Goethe University Frankfurt	Agree	6	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.
Per Krusell	Stockholm University	Agree	6	Bio/Vote History
Botond Kőszegi	Central European University	No Opinion		Bio/Vote History
Eliana La Ferrara	Harvard Kennedy	Did Not Answer		Bio/Vote History
Christian Leuz	Chicago Booth	Agree	2	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	Disagree	4	Bio/Vote History
	ECB can’t do much given low interest rates, but I can stop things getting worse
Kevin O'Rourke	Oxford	Disagree	6	Bio/Vote History
Marco Pagano	Università di Napoli Federico II	Agree	6	Bio/Vote History
Lubos Pastor	Chicago Booth	Disagree	9	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	Agree	10	Bio/Vote History
	There is no evidence of bottlenecks in the financial sector that monetary policy could relax
Richard Portes	London Business School	Disagree	9	Bio/Vote History
Canice Prendergast	Chicago Booth	Agree	7	Bio/Vote History
Lucrezia Reichlin	London Business School	Agree	9	Bio/Vote History
Rafael Repullo	CEMFI	Agree	8	Bio/Vote History
Hélène Rey	London Business School	Strongly Disagree	8	Bio/Vote History
	Has to prevent fall in inflationary expectations
Antoinette Schoar	MIT	Agree	7	Bio/Vote History
Daniel Sturm	London School of Economics	Disagree	3	Bio/Vote History
John Van Reenen	LSE	Strongly Disagree	7	Bio/Vote History
John Vickers	Oxford	Agree	5	Bio/Vote History
Hans-Joachim Voth	University of Zurich	Agree	7	Bio/Vote History
Beatrice Weder di Mauro	The Graduate Institute, Geneva	Agree	6	Bio/Vote History
	Not much much with the existing toolkit
Karl Whelan	University College Dublin	Strongly Disagree	8	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	Agree	8	Bio/Vote History
	A few basis points won't make a difference and liquidity is not an issue now.
Fabrizio Zilibotti	Yale University	Agree	5	Bio/Vote History

Question B Participant Responses

Participant	University	Vote	Confidence	Bio/Vote History
Franklin Allen	Imperial College London	Uncertain	5	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	Agree	5	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	Strongly Agree	9	Bio/Vote History
	Unless utterly irresponsible, in which case adverse effects may dominate
Nicholas Bloom	Stanford	Agree	7	Bio/Vote History
Richard William Blundell	University College London	Agree	2	Bio/Vote History
Agnès Bénassy-Quéré	Paris School of Economics	Strongly Agree	10	Bio/Vote History
	The problem is to calculate the potential.
Elena Carletti	Bocconi	Uncertain	4	Bio/Vote History
Jean-Pierre Danthine	Paris School of Economics	Agree	9	Bio/Vote History
Paul De Grauwe	LSE	Agree	8	Bio/Vote History
Jan Eeckhout	UPF Barcelona	Uncertain	6	Bio/Vote History
Ernst Fehr	Universität Zurich	Agree	8	Bio/Vote History
Xavier Freixas	Barcelona GSE	Strongly Agree	8	Bio/Vote History
Nicola Fuchs-Schündeln	Goethe-Universität Frankfurt	Did Not Answer		Bio/Vote History
Jordi Galí	Barcelona GSE	Agree	8	Bio/Vote History
Luis Garicano	LSE	Did Not Answer		Bio/Vote History
Francesco Giavazzi	Bocconi	Agree	5	Bio/Vote History
Rachel Griffith	University of Manchester	No Opinion		Bio/Vote History
Veronica Guerrieri	Chicago Booth	Agree	9	Bio/Vote History
Luigi Guiso	Einaudi Institute for Economics and Finance	Uncertain	6	Bio/Vote History
Patrick Honohan	Trinity College Dublin	Agree	10	Bio/Vote History
Beata Javorcik	University of Oxford	No Opinion		Bio/Vote History
Henrik Kleven	Princeton	Did Not Answer		Bio/Vote History
Jan Pieter Krahnen	Goethe University Frankfurt	Uncertain	6	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	Agree	7	Bio/Vote History
	If the government’s money isn’t wasted.
Botond Kőszegi	Central European University	No Opinion		Bio/Vote History
Eliana La Ferrara	Harvard Kennedy	Did Not Answer		Bio/Vote History
Christian Leuz	Chicago Booth	Uncertain	2	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	Strongly Agree	5	Bio/Vote History
	Only models with implausible degrees of wage/price flexibility predict otherwise.
Kevin O'Rourke	Oxford	Strongly Agree	8	Bio/Vote History
Marco Pagano	Università di Napoli Federico II	Uncertain	7	Bio/Vote History
Lubos Pastor	Chicago Booth	Agree	6	Bio/Vote History
Torsten Persson	Stockholm University	Did Not Answer		Bio/Vote History
Christopher Pissarides	London School of Economics and Political Science	Strongly Agree	10	Bio/Vote History
	Old fashioned Keynesianism works!
Richard Portes	London Business School	Strongly Agree	10	Bio/Vote History
Canice Prendergast	Chicago Booth	Agree	7	Bio/Vote History
Lucrezia Reichlin	London Business School	Agree	9	Bio/Vote History
Rafael Repullo	CEMFI	Agree	4	Bio/Vote History
Hélène Rey	London Business School	Strongly Agree	8	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	Uncertain	7	Bio/Vote History
Daniel Sturm	London School of Economics	Agree	5	Bio/Vote History
John Van Reenen	LSE	Strongly Agree	9	Bio/Vote History
	Lots of evidence now of the positive effect fiscal policy at zero lower bound
John Vickers	Oxford	Agree	5	Bio/Vote History
Hans-Joachim Voth	University of Zurich	Agree	8	Bio/Vote History
Beatrice Weder di Mauro	The Graduate Institute, Geneva	Agree	9	Bio/Vote History
	The question is how much.
Karl Whelan	University College Dublin	Strongly Agree	10	Bio/Vote History
	There is plenty of empirical evidence for this proposition.
Charles Wyplosz	The Graduate Institute Geneva	Strongly Agree	8	Bio/Vote History
	The literature is now wide and converging.
Fabrizio Zilibotti	Yale University	Agree	5	Bio/Vote History

Question C Participant Responses

Participant	University	Vote	Confidence	Bio/Vote History
Franklin Allen	Imperial College London	Uncertain	5	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	Agree	6	Bio/Vote History
Timothy J. Besley	LSE	Did Not Answer		Bio/Vote History
Olivier Blanchard	Peterson Institute	Strongly Agree	9	Bio/Vote History
	costs of debt small. (output) benefits of deficits large
Nicholas Bloom	Stanford	Uncertain	7	Bio/Vote History
Richard William Blundell	University College London	Uncertain	2	Bio/Vote History
Agnès Bénassy-Quéré	Paris School of Economics	Agree	5	Bio/Vote History
	To the extent that the government can borrow at fixed long term rate
Elena Carletti	Bocconi	Uncertain	4	Bio/Vote History
Jean-Pierre Danthine	Paris School of Economics	Agree	9	Bio/Vote History
Paul De Grauwe	LSE	Agree	8	Bio/Vote History
Jan Eeckhout	UPF Barcelona	Uncertain	7	Bio/Vote History
Ernst Fehr	Universität Zurich	Agree	5	Bio/Vote History
Xavier Freixas	Barcelona GSE	Uncertain	10	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	Agree	8	Bio/Vote History
Luis Garicano	LSE	Did Not Answer		Bio/Vote History
Francesco Giavazzi	Bocconi	Disagree	7	Bio/Vote History
Rachel Griffith	University of Manchester	No Opinion		Bio/Vote History
Veronica Guerrieri	Chicago Booth	Uncertain	10	Bio/Vote History
Luigi Guiso	Einaudi Institute for Economics and Finance	Uncertain	7	Bio/Vote History
Patrick Honohan	Trinity College Dublin	Agree		Bio/Vote History
Beata Javorcik	University of Oxford	Agree	7	Bio/Vote History
Henrik Kleven	Princeton	Did Not Answer		Bio/Vote History
Jan Pieter Krahnen	Goethe University Frankfurt	Disagree	6	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	Uncertain	5	Bio/Vote History
	Ok if debt position is not in danger zone.
Botond Kőszegi	Central European University	No Opinion		Bio/Vote History
Eliana La Ferrara	Harvard Kennedy	Did Not Answer		Bio/Vote History
Christian Leuz	Chicago Booth	Uncertain	2	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	Agree	4	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	Strongly Agree	8	Bio/Vote History
Marco Pagano	Università di Napoli Federico II	Uncertain	7	Bio/Vote History
Lubos Pastor	Chicago Booth	Agree	6	Bio/Vote History
Torsten Persson	Stockholm University	Did Not Answer		Bio/Vote History
Christopher Pissarides	London School of Economics and Political Science	Agree	9	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	Strongly Agree	9	Bio/Vote History
Canice Prendergast	Chicago Booth	Agree	7	Bio/Vote History
Lucrezia Reichlin	London Business School	Agree	9	Bio/Vote History
Rafael Repullo	CEMFI	Uncertain	4	Bio/Vote History
	it depends on the level of public debt.
Hélène Rey	London Business School	Uncertain	8	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	Agree	7	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	Agree	3	Bio/Vote History
John Van Reenen	LSE	Strongly Agree	10	Bio/Vote History
John Vickers	Oxford	Uncertain	5	Bio/Vote History
	Yes if fiscal position is sound but not necessarily otherwise
Hans-Joachim Voth	University of Zurich	Strongly Agree	8	Bio/Vote History
Beatrice Weder di Mauro	The Graduate Institute, Geneva	Uncertain	7	Bio/Vote History
	Depends on the debt level
Karl Whelan	University College Dublin	Agree	8	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	Agree	9	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	Agree	9	Bio/Vote History