by Xavier Ragot
A heated debate is currently taking place in
macroeconomics. The change in US economic policy following the election of Joe
Biden has sparked debate over what to expect from “Bidenomics”. The debate has
seen radical Keynesian proposals being promoted by the “modern theory of money”
(MMT). This movement advocates massive stimulus packages and the monetization
of public debt. This post discusses the MMT proposals through a review of two
recent books that have recently appeared in French: Stephanie
Kelton, The deficit myth (John Murray, 2020) and
Pavlina Tcherneva, The case for a job guarantee (Polity, 2020).
Continue reading “The “modern theory of money” – is it useful?”
Christophe Blot, Caroline Bozou and Jérôme Creel
In a recent Monetary
Dialogue Paper for the European Parliament, we review
and assess the different policy measures introduced by the ECB since the
inception of the COVID-19 crisis in Europe, mainly the extension of Asset
Purchase Programme (APP) measures and the development of Pandemic Emergency
Purchase Programme (PEPP) measures.
APP and PEPP have had distinct
objectives in comparison with former policies. APP has
been oriented towards price stability while PEPP has been oriented towards the
mitigation of financial fragmentation.
To this end, we start by analysing the effects of APP announcements
(including asset purchase flows) on inflation expectations via an event-study
approach. We show that they have helped steer expectations upward.
Then, we analyse the impact of PEPP on sovereign spreads and show that
PEPP has had heterogeneous effects that have alleviated fragmentation risk:
PEPP has had an impact on the sovereign spreads of the most fragile economies
during the pandemic (e.g. Italy) and no impact on the least fragile (e.g. the
Netherlands). However, sovereign spreads have not completely vanished, making
monetary policy transmission not fully homogeneous across countries.
On a broader perspective, we also show that overall macroeconomic
effects have been in line with expected outcomes since the mid-2000s: ECB
monetary policy measures have had real effects on euro area unemployment rates,
nominal effects on inflation rates and financial effects on banking stability. These
results are in line with recent estimates at Banque de France (Lhuissier
and Nguyen, 2021).
As a conclusion, an increase in the size of the PEPP program, as
recently decided by the ECB, will be useful if financial risks re-emerge.
Meanwhile, we argue that an ECB decision to cap the sovereign spreads during
the COVID-19 crisis would alleviate the crisis burden on the most fragile
economies in the euro area, where sovereign spreads remain the highest.
By Christophe Blot and Paul Hubert
In response to the health and economic crisis,
governments have implemented numerous emergency measures that have pushed public
debt up steeply. They have nevertheless not experienced any real difficulty in
financing these massive new issues: despite record levels of public debt, the
cost has fallen sharply (see Plus ou moins de
dette publique en France ?, by Xavier
Ragot). This trend is the result of
structural factors related to an abundance of savings globally and to strong
demand for secure liquid assets, characteristics that are generally met by
government securities. The trend is also related to the securities purchasing programmes
of the central banks, which have been stepped up since the outbreak of the
pandemic. For the year 2020 as a whole, the European Central Bank acquired
nearly 800 billion euros worth of securities issued by the governments of the
euro zone countries. In these circumstances, the central banks are holding an
increasingly high fraction of the debt stock, leading to a de facto
coordination of monetary and fiscal policies.
Continue reading “Public debt: Central banks to the rescue?”
By Christophe Blot and Paul Hubert
The return of new lockdown measures in numerous countries
is expected to slow the pace of economic recovery and even lead to another
downturn in activity towards the end of the year. To address this risk,
governments are announcing new support measures that in some cases supplement
the stimulus plans enacted in the autumn. No additional monetary policy
measures have yet been announced. But with rates close to or at 0% and with a
massive bond purchase policy, one wonders whether the central banks still have any
manoeuvring room. In practice, they could continue QE programmes and increase
the volume of asset purchases. But other options are also conceivable, such as
monetizing the public debt.
Continue reading “What more could the central banks do to deal with the crisis?”
by Jérôme Creel (OFCE & ESCP Business School) 
On 27 May, the European Commission proposed the
creation of a new financial instrument, Next Generation EU,
endowed with 750 billion euros. The plan rests on several pillars, and will notably
be accompanied by a new scheme to promote the revival of activity in the
countries hit hardest by the coronavirus crisis. It comes on top of the
Pandemic Crisis Support adopted by the European Council in April 2020. A new
programme called the Recovery and Resilience Facility will have firepower of 560
billion euros, roughly the same amount as the Pandemic Crisis Support. The
Recovery and Resilience Facility stands out, however, for two reasons: first,
by the fact that part of its budget will go to grants rather than loans; and
second, by its much longer time horizon.
Continue reading “Europe’s recovery plan: Watch out for inconsistency!”
Jérôme Creel, Mario Holzner, Francesco Saraceno, Andrew Watt and Jérôme Wittwer
The Recovery Fund recently proposed by the EU Commission marks a sea-change in
European integration. Yet it will not
be enough to meet the challenges Europe faces. There has been much
public debate about financing, but little about the sort of concrete projects
that the EU should be putting public money into. We propose in Policy
Brief n°72 a 10-year, €2tn investment programme focusing on public health,
transport infrastructure and energy/decarbonisation.
Continue reading “How to spend it: A proposal for a European Covid-19 recovery programme”
Jérôme Creel, Xavier Ragot, and Francesco Saraceno
The second meeting of
the Eurogroup did the trick. The Ministers of Finance, after having once again laid
out their divisions on the issue of solidarity between euro area Member States on
Tuesday 7 April 2020, reached an agreement two days later on a fiscal support plan
that can be put in place fairly quickly. The health measures taken by the Member
States to limit the spread of the Covid-19 pandemic will enjoy better
short-term financing, which is good news. The additions to Europe’s tools for
dealing with the crisis will be on the order of 500 billion euros – this is
certainly not negligible, and note that this comes on top of the efforts
already put in place by governments – but this corresponds mainly to a new
accumulation of debt by the Member States. The net gain for each of them, as we
shall see, is actually quite marginal.
Continue reading “It seems like it’s raining billions”
By Christophe Blot and Xavier Timbeau
In parallel with the decisions taken by the US Federal Reserve and the European Central Bank (ECB), governments are stepping up announcements of stimulus packages to try to cushion the economic impact of the Covid-19 health crisis, which has triggered a recession on an unprecedented scale and pace. The confinement of the population and the closure of non-essential businesses is leading to a reduction in hours worked and in consumption and investment, combining a supply shock and demand shock.
Continue reading “What do the fiscal stimulus strategies in the United States and Europe reveal?”
By Fergus Cumming (Bank
of England) and Paul Hubert (Sciences Po – OFCE, France)
Does the transmission
of monetary policy depend on the state of consumers’ debt? In this post, we
show that changes in interest rates have a greater impact when a large share of
households face financial constraints, i.e. when households are close to their
borrowing limits. We also find that the overall impact of monetary policy
depends in part on the dynamics of real estate prices and may not be
symmetrical for increases and decreases in interest rates.
Continue reading “The transmission of monetary policy: The constraints on real estate loans are significant!”
By Pierre Aldama and Jérôme Creel
At the euro zone summit in December 2018, the heads of state and government hit the brakes hard on the reform of fiscal governance: among the objectives assigned to the euro zone’s common budget that they are wishing for, the function of economic stabilization has disappeared. This is unfortunate, since this function is the weak point of the fiscal rules being pursued by the Member States. Continue reading “Europe’s fiscal rules – up for debate”