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Faculty of Economics

Tuesday, 15 December, 2020

The 2020 Geneva Report has been published. Co-authored by Professor Giancarlo Corsetti from the Faculty of Economics at the University of Cambridge, the 23rd report in the sequence looks at macroeconomic and financial instability and disruptive crises such as the COVID-19 pandemic. It addresses the key question of how Monetary and Fiscal policies can work together in the emergency, delivering the required stimulus and economic support, while preserving the credibility and effectiveness of their respective instruments.

The report argues that the need for an effective policy mix has rarely been more pressing. Since the Global Financial Crisis of 2008-2009, with interest rates at their lower bound, monetary policy has been caught in a race to ever expand the set of unconventional tools. Fiscal policy had faced the challenge of operating under the burden of a high and rising level of debt.

The economic crater opened by the COVID-19 pandemic has exacerbated the stabilization challenge. The policy debate has shifted from how far we can push negative interest rates and QE’ to ‘fiscal and monetary policies must act vigorously together’.

Quoting from the report, Professor Corsetti says “Before the Great Recession, the concept of the policy mix had virtually disappeared from economics textbooks. Now with COVID, it is back with a vengeance. Monetary and fiscal authorities have to join forces to deliver the required macroeconomic stimulus. However, the use of unconventional policies is blurring the traditional boundaries between monetary and fiscal interventions.”

He suggests that these developments are not the end of a decades-old consensus on the way to conduct stabilisation by independent policy makers, but they are a stress test calling for the existing paradigm.

He says in the report, the authors argue that “policymakers have usefully exploited complementarities between monetary and fiscal instruments. However, for such monetary-fiscal coordination to work, policy instruments must remain effective. This requires that the credibility of desirable long-term goals, such as healthy growth under price stability and public debt sustainability, is preserved and backed by a resilient institutional framework. “

Looking into the future, the report warns against a future where monetary and fiscal policies are kept constrained by the zero lower bound on interest rates and historically high public debts. Both instruments are required to deliver stimulus facing large shocks. More crucially, without both instruments, even small shocks can snowball into large and disruptive tail event.

“To see the problem, think of our ‘economic policy boxer’ with both hands somehow tied,” he suggests. “Even a potentially innocuous adversary (let alone the Mike Tyson of COVID-19) could become a dangerous opponent. With both hands tied, we will leave in a permanent state of vulnerability.”

With high debt and policy rates already at zero or negative, rebuilding policy space is a priority. To this end the report closes with a call for globally coordinated action. “What we need is a rise in the equilibrium interest rates, as a globally shared policy objective---as a compass to guide an internationally coordinated effort to correct the currently large imbalances between investment and saving.”

Professor Corsetti sums it up by saying “What we need is a virtuous circle of stronger growth, more even distribution of the benefits from this growth, and reduced indebtedness, that would be essential to redress pressing issues in climate change and health-related shocks. No country can achieve this on its own.”

The full report ‘It is all in the mix. How Monetary and Fiscal policies can work or fail together’ is available here:

The Geneva Reports on the World Economy were launched by the International Center for Monetary and Banking Studies (ICMB) and CEPR in 1999. Each title focuses on an aspect of the reform of the international financial and economic systems.


Launch Event

Prof. Giancarlo Corsetti spoke at a policy panel on the 2020 Geneva report. In the online Banque de France PSE Chair Policy Panel, the authors of the report discuss their conclusions for monetary-fiscal policy coordination in Europe, and ask how can macroeconomic policies contribute to bringing Europe back to a path of sustained and stable growth?

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