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TRANSCRIPT
TalkgivenattheG7meeting,MonetbelloQuebecMartinEichenbaum,February72018
Iamaneconomist,bornandbredinMontreal.Soifthere’sonethingthatIknowit’s
this:Winteriscoming;L’HIVERVIENT.
IalsoknowthatSummeristherighttimetoprepareforthestormsofWinter.
Wearenowinwhatwillsoonbethelongestpost-warU.S.expansionandaperiod
ofrobustglobalgrowth.SotheMontrealersaystoyou,nowisthetimetofixour
homesandre-thinkourframeworkfordealingwithfuturestorms.Preparez–vous.
WiththatinmindI’dliketodiscussthechallengesthatfacepolicymakersinthenew
worldoflowneutralinterestrates.Giventheintenseamountofattentionthathas
beendevotedtothistopic,mypersonalchallengeistosaysomethingthatisboth
newandcorrect.Inthisforumthebalanceofrisksarguesforfocusingon`correct’.
Inanutshellhere’smyargument.Thenaturalrateofinterestrateappearstohave
fallen.Absentachangeinourcurrentmonetarypolicyregime,theeffectivelower
boundoninterestrates–forshorttheELB-willbeabindingconstraintfarmore
frequentlyinthefuturethatitwasinthepast.
Unconventionalmonetarypoliciescancertainlyplayapositiverolewhenthat
constraintbinds.Butweshouldn’tbeoverlysanguineabouthowpowerfulthose
policiesare.Andweshouldalsobeskepticalthatnewmonetarystrategieslike
price-leveltargetingcandealeffectivelywiththeELBconstraint.SinceI’mnot
willingtoadoptahigheraverageinflationtarget,Iconcludethatmonetarypolicy
won’tbeaseffectiveinstabilizingeconomicactivityasitwas.Thisconclusion
forcesmetore-thinktheroleoffiscalpolicyinfightingrecessions.
Tobeclear,IcontinuetobelievethatwhentheELBisn’tbinding,fiscalpolicyisn’ta
verypowerfulstabilizationtool.Butfiscalpolicycanbeextremelypowerfulwhen
conventionalmonetarypolicyhasbeenneutered.Sothecriticalchallengefacingus
istodeviseapracticalframeworkforusingfiscalpolicywhenweneedit.InthistalkIarguethataprogramofasymmetricautomaticstabilizersissuchaframework.ByasymmetricautomaticstabilizersImeanchangesintraditionalstabilizerprogramsandcertaintaxratesthatkick-inandkick-outautomaticallywhenclearly
articulated,easytomeasureandsimpletocommunicatemacrovariableshitpre-
specifiedtargets.Mypreferenceistomakethatkeytargetvariabletheshort-term
policyrate.Asymmetricprogramswouldbeginwhenshort-termpolicyrateshitthe
ELB.Theywouldendwhentheactualshort-termpolicyratearebacktocentral
bankers’self-declaredlong-termshort-terminterestrates.
Ifavorthesetargetsbecausecentralbankersareforwardlookingintheirdecision-
makinganditmakestheuseoffiscalpolicyforstabilizationpurposesexplicitly
linkedtoabinding-ELBepisode.Butifyoutoldmethatyoupreferunemployment
ratetargetsbecausethey’reeasiertoselltolegislatorsoryou’reconcernedabout
thepoliticsoflinkingfiscalactionstocentralbankactionsIwouldgrumpilyagree.
Tobeclear,thedetailsofwhichautomaticstabilizersarethemosteffectivewillbe
countryspecific.InstitutionsandfiscalenvironmentsvaryacrosstheG7.Butthe
ELBconundrumandtheeconomicsofasymmetricautomaticstabilizersiscommon
toallofus.
Nowforsomedetails.Let’sstartwithsomethingthat’snotnewbutistrue.Under
ourcurrentinflationtarget,weshouldanticipatelownominalinterestratesfora
verylargefractionofthetime,evenin`good’times.Overreasonableperiodsoftime,
thenominalinterestrateisequaltothenaturalrealinterest-rateplusourbroadly
sharedinflationtargetrate(2%).Thereisnowoverwhelmingevidencethatthe
naturalrateofinteresthasfallen.Econometricestimatessuggestthatit’sbelow1%
intheG7.
Youdon’tneedfancyeconometricstoconvinceyourselfthatthenaturalrealrateis
decliningandthatthedeclineisn’tjustapost-financialcrisisphenomenon:just
stareattheseculardeclineintheTIPSrate.
Givenanunchangedinflationtarget,it’snotsurprisingthatcentralbankshave
persistentlyreviseddownwardstheirestimatesofthelong-runneutralinterest
rate.
RightnowintheU.S.it’sat2.8%.That’sroughlywhatyougetwhenyouaddcurrent
estimatesofthenaturalinterestratetoaninflationtargetof2%.Market-based
estimatesofthelong-runshortrateareifanythinglowerthantheFed’s.
1
Estimates of the natural interest rate
Percent
Secular decline in real interest rates
2
Long-run short rates
3
What’stheproblemwithsuchalowneutralpolicyrate?
Intheeightrecessionsfrom1957on,theFeddroppednominalandrealFederal
fundsratebyabout500basispoints.Butifwestartat2.5–3.0percent,monetary
policywillsimplylacktheroomtodowhatitnormallydoesandtheELBwillbe
binding.
HowoftenwillELBbebinding?
Inthepost-wareratheU.S.hasfallenintoarecessionaboutonceevery7years.If
theELBbindsforabout3years,thenyou’reattheZLBabout30%ofthetime.This
calculationisconsistentwithasimilarbackoftheenvelopecalculationmadeby
LarrySummersataBrookingInstitutesymposiumandmuchmoresophisticated
projectionsmadeinarecentpaperbythestaffattheBoardofGovernorsand
Couldthisestimatebeoff?
Ofcourseitcouldbe.It’seasytothinkofreasonswhy30%isanunder-estimate.• Wecouldstillbeunder-estimatingthegrowthrateofrealGDP.
• There’saveryhighdegreeofgeo-politicalrisk,e.g.tradewarsand,even
worse,actualwars.
• Theeconomyismorefinancializedthaneverwithhighleveragelevels,ahigh
ratioofwealthtoincomeandassetmarketsthatarepricedtoperfection.
• Infactit’sasifassetmarketswereareworkingtogetHymanMinskyanin-
memoriumNobelprize.AfterthisweekMinskyislookingbetterthanever.
It’sharderbutcertainlypossibletothinkofreasonswhymy30%estimatecouldbe
anover-estimate.PerhapsAIandvariousotherpromisedhightechwonderswill
translateintohighergrowthratesofproductivityandhigherrealinterestrates.
Stillwithallthosecaveats,there’snocompellingreasontothinkthatmyestimates
arewayoff.Andiftheyaren’t,theeconomicandsocialcostsofineffectivemonetary
policywillbeextremelylarge.AninfluentialpaperfromtheBoardofGovernors
estimatesthecoststoberoughly2trillionoveradecade.LarrySummersthinksit’s
moreintheballparkof1trillion.ButevenattheSummersLowerBound,thecosts
areenormous,especiallywhenyourealizethattheyabstractfrompoliticaleconomy
considerations.Surelythedangersfrompopulismandbadpolicyarelinkedthe
frequencyandintensityofrecessions.
SoitshouldbeeasytoconvinceyourselfthatthestakesingettingaroundtheELB
conundrumareenormous.
Whataboutunconventionalmonetarypolicy?
BenBernankefamouslynotedthatunconventionalmonetarypolicydoesn'tworkin
theorybutitmightworkinpractice.Frankly,theevidenceonhowwellitworkedin
practiceoutsideof`liquidityevents’orincipientsovereigndebtcrisesisatbest
murky.
Inanyevent,supposethatwestartthenextrecessionat2.5%ten-yearrates.If
policymakerscutshortratesto25basispoints,theten-yearratemightfalltoabout
1.5%.AtthatpointtheELBisbinding.
Howmuchextrastimulusdowethinkwecouldgetfromanyformofunconventionalmonetarypolicy-includingforwardguidance-thatpushedlong
ratesabitlowerthan1.5%?
Asanaside,Isuspectthatmarketswillbeskepticalaboutforwardguidance,i.e.
promisesmadewhentheELBisbindingtokeeppolicyrateslowerthannormally
wouldbethecaseinanefforttoflattentolowerlong-termrates.AfteralltheFed
andtheBankofCanadaaremovingtotighteneventhoughinflationinboth
countriesisstilllessthan2%.Suchactions–whileperhapsjustifiedbyvariousconsiderations-undercutanycredibilitycentralbankshadaboutfutureforward
guidance.
Whataboutmonetarypolicystrategieslikeprice-leveltargeting?
Price-leveltargetingisinprincipleacleverwayaroundtheELBconundrum.
Basicallyit’sastrategyforcommittingtoforwardguidance.Butit’snotwithout
problems,includingthebasicquestionofhowlongitwouldtakepeopleto
understandthestrategyandthepoliticalproblemsassociatedwithslowingdown
theeconomytoreversepastshockstothepricelevel,saybecauseofanoilshock.
GivenmytimeconstraintsIwon’tgointoanymoredetailonthisissuehere.
InsteadIre-iterate.Wearenowinaworldwheretheneutralpolicyrateisinthe2.5–3.0percentrangeandmonetarypolicywon’t,onaverage,beaseffectiveat
stabilizingoutputisitusedtobe.Weare,inshort,inthegripsoftheELB
conundrum.
Ifyouagreewithme,thenyou’reforcedtoreconsidertheconventionalwisdom
abouttheotherprimarysetoftoolsthatwehavetofightrecessions,collectively
knownasfiscalpolicy.
In1997Iwrotethat`Thereisnowwidespreadagreementthatcountercyclical
discretionaryfiscalpolicyisneitherdesirablenorpoliticallyfeasible.’Fiveyears
later,MartyFeldsteinobserved`Monetarypolicyis...generallyacceptedasthe
policyofchoicewhen...stimulatingaweakeconomy.’
Theseviewsweren’tidiosyncratictoFeldsteinandme.Therereallywassuchaa
widespreadconsensusthatreflectedtwofundamentalconsiderations.
Thefirstwaspolitical–it’shardtodesignandimplementwisediscretionaryfiscal
policyinthemiddleofacrisis.Andit’sevenhardertotakeawaythingsthatyou
gavepeopleinafitofdiscretion.
Thesecondconsiderationiseconomic.Mostformsofdiscretionarypolicyjustaren’t
verypowerfulina`normal’downturn.The`multiplier’associatedwithmosttypes
ofdiscretionarytaxcutsandincreasesingovernmentspendingissubstantiallyless
thanone.Agoodestimateistheonehard-wiredintopre-crisisIMFspreadsheets:
onaverage,realGDPgoesupbyabout50centsforadollarincreaseingovernment
spending.Taxcutmultipliersareperhapsabitlargerbutstilllessthanone.
Thebasicreasonforthesmallmultiplieristhatexpansionaryfiscalpolicyleadsto
higherrealinterestratesasgovernmentsborrowmoreandcentralbanksraiserates
inresponsetodecliningoutputgapsandrisinginflation.Risingrealratescrowdout
privateconsumptionandinvestmentspending,partiallyoffsettingthedirecteffect
ofexpansionaryfiscalpolicy.
Sobothpoliticsandeconomicsunderpintheconventionalwisdomthat,innormal
times,weshouldleavestabilizationpolicyintheablehandsofcentralbankers.
Butwhataboutabnormaltimes?ThedepthandlengthoftheGreatRecession
demonstratedwithbrutalclaritythatmonetarypolicycan’talwaysdothejob,
certainlynotwhentheELBconstraintisbinding.That’sthebadnews.Thegood
newsisthatwhilemonetarypolicyislesspowerfulinsuchacrisis,fiscalpolicyis
morepowerful.
Tobeginwith,it’shighlyunlikelythatgovernmentborrowingwillputsubstantial
pressureonrealratesinadeeprecession.Householdsandmostbusinessesweren’t
exactlyscreamingforloansin2011.Second,whentheELBisbindingandshort-
termnominalinterestratesarestuckatzero,ariseininflationreducesrealrates.Butthatencouragesprivatespending.
Evenmoregoodnews:ariseinprivatespendingleadstoafurtherriseinoutput
andexpectedinflation,afurtherdeclineintherealinterestrateandafurtherrisein
consumptionandinvestment.SowhentheELBisbinding,expansionaryfiscal
policyleadstoavirtuouscyclethatcrowdsinprivateconsumptionandinvestment,
preciselytheoppositeofwhathappensinnormalrecessions.
Inshort,whentheELBbinds,weexpectthemultipliertobelargerthanone.
StructuralmodelsofthetypeusedattheIMFandG7centralbankshaveexactlythis
property.Themostsophisticatedversionsofthosemodelsimplythatthebiggerthe
crisis,thebiggeristhemultiplier.Ofcourseitsexactsizeofthemultiplierdepends
onthepreciseformthatdiscretionarypolicytakes,howtimelyitis,acountry’s
opennesstotradeanditspre-existingdebtsituation.
Sowhat’stheproblem:whynotjustrelyonemergencydiscretionaryspendinginacrisis?Tobeginwith,politicaleconomyconsiderationsmakethenatureandsizeof
discretionaryfiscalpolicyuncertain.Evenworseittakestimetoactuallyimplement
theprogramsyouagreeon.Inaddition,someprojectsjusthavenaturallyslow
spend-outrates.Forexample,CBOestimatesthatoutofeach$1appropriatedfor
highwayexpenditures,onlyabout25centsgetsspentinthefirstyear.
Implementationlagssubstantiallyreducethesizeofthemultiplier,especiallyifit
meansthatstimulusplannedforanELBepisodeactuallycomesonlineaftertheELB
isn’tbindinganymore.Somultipliersthatare,inprinciple,largecanbesmallin
practice.
Whatdothedatasayaboutwhetherwecancountondiscretionaryfiscalpolicyintoughtimes?
ConsiderthefollowingindexoffiscalpolicydevelopedattheBrookingsInstitute’s
Hutchin’sCenter.Themeasuredepictsthecontributionoffederal,state,andlocal
fiscalpolicytonear-termchangesinUSGDP.Themessageisclear:ratherthanbeing
apositiveforce,fiscalpolicywasactuallyadragontheU.S.economyfrom2011on.
ArguablythesituationinEuropewasmorecomplicated.Butfiscalpolicyalsoalmost
certainlycontributedtothedepthoftherecession.Giventimeconstraints,Irefer
youtoworkbyOlivierBlanchard,exchiefeconomistoftheIMF,andmyownwork,
withcolleagues,fortheIndependentEvaluationofficeoftheIMFthatevaluatedthe
TroikaprograminPortugal.
LookingacrosstheUSandEuropeanexperiencesIinferthatwecan’tcounton
discretionaryfiscalpolicytopickupthemantlewhenmonetarypolicycan’tdowhat
itnormallydoes.
Hutchins Center Fiscal Impact Measure Contribution of Fiscal Policy to Real GDP Growth
4
AsymmetricautomaticstabilizersareafarmorepromisingroutetosolvingtheELB
conundrum.
Whyautomaticstabilizers?Theansweristhatthey’refast,they’reeasiertowiselydesigninnon-crisissituations,and,becausethey’reembeddedinlaw,households
andfirmscancountonthemwithahighdegreeofcertainty.
Letmeexplaininmoredetail.First,expandedautomaticstabilizersaretriggeredonandoffbyeconomicconditions.Thistriggerstructureisclearlypreferabletorelyingonthepoliticsofthemoment.Byconstruction,stimulusstartsquicklywhenithas
themosteffectandendswhenitisn’tneeded.
Second,policiesthataredesignedandlegislatedoutsideofacrisisarefarmore
likelytobebetterthoughtout,morecarefullyvettedandbettercommunicatedthan
discretionaryactsdesignedinthemiddleofacrisis.
Third,becauseexpandedautomaticstabilizerswouldbeembeddedinourlegal
framework,households,firmsandsubnationalgovernmentswouldbemorelikelyto
factorexpandedbenefitsintotheirdecisionsthandiscretionaryfiscalpolicy.This
advantageispotentiallyabigdeal.Forgoodreasons,householdsareafraidoflosing
theirjobsinasevererecession.Soit’snaturalforthemtoincreaseprecautionary
savings,beforeandduringasevererecession.
Eventhoughthisriseisprivatelyoptimal,it’sdeeplycounter-productivefroma
socialpointofview:itmakesabadsituationworse.Themorecertainpeopleare
thatthey’llgetexpandedhelpinasevererecessionthelesstheyfeelaneedtobuild
uptheirsavings.Soexpandingthehelpthatweoffertopeopleinsuchepisodes
reducesthelikelihoodthattheyactuallywillneedhelp.
Whyasymmetricstabilizers?Thereareimportantnegativeeffectsassociatedwithmanyautomaticstabilizer
programsandlimitedbenefitsduringnormaltimes.Butthebenefitsrise
dramaticallywhentheELBconstraintisbinding.Soitmakessensetoinvoke
changesinautomaticstabilizersonlywhenwehitpre-definedmacrotriggers.
Tobeconcrete,consideraprogramthatalreadyexistsinallG7countries:
unemploymentinsurance.Onthepositiveside,suchinsurancereduces
precautionarysavingsandraisestheincomeofpeoplewhohaveahighmarginal
propensitytoconsume.
Buttheaggregateimpactoftheseeffectsisreasonablysmallinnormalrecessions.
Afterallrelativelyfewpeoplebecomeunemployedinanormalrecessionand,at
leastintheU.S.andCanada,unemploymentis,forthevastmajorityofpeople,a
short-livedphenomenon.
Ontheflipside,innormaltimes,ariseinunemploymentinsurancebenefitshas
importantnegativeeffects.Byincreasingworkers’outsideoptions,high
unemploymentbenefitsleadstoanincreaseinwagesandafallinthenumberof
vacanciespostedbyfirms.Sotheytendtoreduceaveragelevelsofemployment.
Inanormalrecession,expandedbenefitsleadtoariseinrealwageswhichexerts
upwardspressureoninflation,potentiallyleadingtoariseininterestrates.
Sowhilegenerousunemploymentbenefitscanberationalizedonavarietyof
grounds,weshouldn’texpectariseinbenefitlevelstobeaverypowerfulwayto
fightnormalrecessions.
Thepositiveimpactofunemploymentbenefitsislikelytobemuchhigherwhenthe
ELBbinds.First,increasesindemandarethoughttobeparticularlypowerfulin
deeprecessions.Thisisexactlythekindofsituationwhereyouwanttoprevent
risesinprecautionarysaving.Expandedunemploymentbenefitsdoexactlythat.
Second,ifmoregenerousunemploymentbenefitsputupwardspressureonwages
andinflationwhentheELBbinds,theylowerrealinterestrates.That’sjustwhatwewant.
Inrealityextendingunemploymentinsurancebenefitsduringtimesofhigh
unemploymenthasbecomestandardoperatingprocedureinmanycountries.Andin
theUnitedStatesunemploymentinsurancealreadyhasadegreeofasymmetric
automaticity.
Theextendedbenefitsprogramprovidesforanadditional13or20weeksofjobless
benefits(beyondtheusual26weeks),andiscurrentlytriggeredautomaticallywhenastate’sunemploymentraterisesabove5percent.ButCongressoftenenacts
additionaldiscretionaryincreasesinunemploymentinsurancecoverage.Normally,thefederalgovernmentcovershalfthecostoftheextendedbenefits.Butitpaidthe
paidtheentirebillintheaftermathofthefinancialcrisis.Thisactionwasvery
importantbecausestatesoperateunderbalancedbudgetconstraints.Ifstateshadto
spendmoremoneyonunemploymentinsurance,theywouldhavehadtocutback
onotherexpenses.
Butwhyshouldindividualsorstateshavetoguessaboutthemagnitudeandtiming
ofextensions?Surelyitmakessensetoeliminatethissourceofuncertainty.
Tobeconcrete,wecouldbylawmandatethatifthefederalfundsratehit25basis
points,weautomaticallymovetoanextendedbenefitsprogramunderwhichthe
federalgovernmentpays100percentofthecostofupto52additionalweeksof
higherbenefits,forstatesexperiencingrapidjob-lossesorhighunemployment.
Moregenerally,wecouldlegislateautomaticgrantsfromthenationalgovernment
tostateandlocalgovernmentsthatbeginandendinresponsetomacrotriggers.In
thiswaywewouldpreventcutsingovernmentspendingduringanELBepisodeand
shutthespigotoffwhentheaidisnolongerrequired.
SomethinganalogoustothisgrantapproachhappensnowintheU.S.withMedicaid,
healthcareforlow-incomeindividuals.Thecost-sharingformulaforthisprogram
betweenthestatesandthefederalgovernmentisadjustedperiodicallytoaccount
fordifferentialincomegrowthbystate,butitisn’texplicitlycyclical.Itshouldbe.
Whystopwithasymmetricincreasesanddecreasesofexistingtransferandsocial
insuranceprograms?Whynotpursueunconventionalfiscalpolicy?
Thebasicideaistowriteintolawmacrotriggersfortemporarytaxcutsandtriggers
forendingthosecuts.Taxscheduleswouldautomaticallychangeinextreme
circumstanceswhentheELBbecomesbindingandreverttotheiroldlevelswhena
crisisisover.Inprinciple,timevaryingtaxratescanexactlyreproducethe
outcomesthatwouldobtainifmonetarypolicydidn’tfaceanELBconstraint.
Theintuitionforwhytaxpolicycan,undercertaincircumstances,neutralizethe
effectsoftheELBconstraintisstraightforward.Suppose,thatpolicymakerswould
liketomakerealinterestratesnegativetoinducehouseholdstoconsumemore.
Therelevantpricesforhouseholds’decisionsareconsumerprices,grossofconsumptiontaxes.ThisfactsuggestsloweringconsumptiontaxeswhentheELBbindsandraisingthemafteryou’veemergedfromtheELB.
Amoregeneralversionofthispolicywouldcommit,whentheELBisbinding,toa
decreasingpathforlaborincometaxes,coupledwithatemporaryinvestmenttax
creditoratemporarycutincapitalincometaxes.Alltaxchangeswouldreversed
whentheELBisnolongerbinding.
Youwillnodoubtfindthesetypesofproposals`exotic’.Butit’sthebasicidea
behindtheadvicethatMartyFeldsteingavetoJapan:temporarilysuspendtheVAT,
andcommittoraisingittwoyearslater.Ineffectputconsumptiononsale.It’salso
thebasicideabehindtemporarytaxcreditstoboostprivateinvestment
OfcoursesomecountriesliketheU.S.don’thaveaVATorageneralsalestax.But45
ofthe50statesdohaveasalestax.AlanBlinderproposedthatinthosecasesthe
federalgovernmentoffertoreplacethelostrevenueofsub-nationalgovernments
thatagreetocutsalestaxforafixedperiodoftime.
ThekeydifferencebetweenFeldsteinandBlinder-likeproposalsand
`unconventionalfiscalpolicy’isthatchangesintaxpolicieswouldbeset-offbypre-
definedmacrotriggers.Thispointiscrucial:pre-definedtriggerswillleadtomore
sensibleoutcomesandavoidpotentiallyperverseincentivesassociatedwithsimple
time-dependentrules.
Afinaladvantageofunconventionalfiscalpolicyisitthatallowscountriesthat
sufferdifferentshocksbutoperateunderacommonmonetarypolicytoadjust
macropolicytocountry-specificshocks.Thisstrikesmeasabigdeal.Thereisno
reasontowantcyclicalfiscalpolicytobethesameacrosstheEuropeanUnion.
Tobeclear:Iunderstandthatasymmetricautomaticstabilizersandunconventional
fiscalpolicyarenotapanacea.Ifnothingelse,theyallinvolvepotentiallyserious
timeconsistencyissueswhentimesaregoodandtaxcutsaresupposedtobe
reversed.Butwritingasymmetricautomaticstabilizersorunconventionalfiscal
policyintolawintranquil,prosperoustimeswouldsurelyhelp.
Inconclusion,Ihavearguedthat,becauseofthefallinthenaturalrealinterestrate,
theELBboundonmonetarypolicywilllikelybindwithuncomfortablefrequency.
Absentchangesinourpolicymix,thesocialcostoftheseepisodeswillbelarge.
Weshouldbyallmeansexplorealternativemonetarypolicystrategiestodealwith
theproblem.Butabsentawillingnesstopermanentlyraiseinflationtargets,Iam
skepticalthatexistingalternativescan,bythemselves,dealwiththeproblem.We
mustlookattheothertoolsinourpolicyquiver.
Surelywecandobetterthanmaddashdiscretionaryfiscalpolicydesignedand
implementedinthecauldronofacrisis.BuildingonBernanke’sideaforasymmetric
priceleveltargeting,I’veurgedthatweadoptaprogramofasymmetricautomatic
stabilizers.Myownpreferenceisfortheasymmetriestokickinexactlywhen
monetarypolicylosesitspower,i.e.whencentralbankersannouncethattheELBis
binding.Theasymmetriesshouldend,whenpolicyratesindicatethattheELBisno
longerbinding.
Iamacutelyawareofthepoliticalchallengesinvolvedinsuchaninitiative.AndI
havenodoubtthattherightprogramofasymmetricautomaticstabilizerswillvary
acrosscountries.Skepticismiswarranted.Butitwasalsowarrantedwhenwe
movedtoflexibleinflationtargetingandquantitativeeasing.
Imayormaynothavemovedyourpriorsaboutfiscalpolicy.IfIhaven’t,theballis
inyourcourt.Whoherewouldratherraiseinflationtargetstogetaroundthe
problemofmorefrequentELBepisodes?Andifnotthat,thenwhat?Eliminating
currency,androllingthediceonfinancialstabilitywithnegativerealinterestrates?
Nothankyou.
IfIhavebudgedyourpriorsaboutusingasymmetricautomaticstabilizers,thetimetostartdownthepathisnow,withthefirmunderstandingthattheperfectshould
notbetheenemyofgood.Itwilltakealongtimetocomeupwithconcretecountry-
specificproposalsandthepoliticalconsensusrequiredtoadoptusingasymmetric
automaticstabilizers.Thelongerwedelay,themorelikelyitisthatwewillfallinto
thenextcrisiswithoutthetoolsthatweneed.