Thread by @inesgraposo

About to start! Alberto Alesina, Richard Portes, @ojblanchard1 ,Veronica Guerrieri, Charles Wyplosz in @unibocconi to celebrate Francesco Giavazzi’s 70th birthday w/discussion on Eurozone fiscal rules, monetary-fiscal coordination,and Maastricht rules preventing debt monetization

Five points from @ojblanchard1:1/Fairly confident that interest rates will be low for a long time. Not due to the crisis, but reflection of a long trend since mid-80s. Underlying factors are still up to debate. Option prices suggest that investors are convinced this will last.

2/ This puts sharper limits on what monetary policy can do with regards to the effective lower bound (and also given that negative real rates probably become perverse at some point).
3/ ...and puts softer limits on fiscal policy. The risks are lower and so are the costs.

...so regardless of how you define it, there is much more fiscal space than before.
4/ Fiscal consolidation -still very much on the agenda on EZ- has high economic, political costs and low benefits. For fiscal consolidation plans, better wait until monetary policy can help...

...In the meantime, focus should be on the level and composition of spending in EZ countries.
5/ If there is a eurowide recession, there will be a need for fiscal coordination. It is essential to think about this issue before it happens, if it happens.

Alesina does not give too much importance to signals from financial markets ("financial markets tend to predict what happened in the past"). Rather, he centers his intervention on criticising the general "contractionary vs expansionary" approach to fiscal policy debates.

Literature on the magnitude differences of the tax (>>>3) and spending multipliers (<<<1) suggests that, regardless of debating an expansion, G vs. T matters. So does the composition/allocation of "more" debt.

Alesina says it's difficult for Italy to engage in coordination. What Italy can do is rely on the "reasonably strong evidence" that spending multiplier is much lower and play with that for growth inducing policies, bearing in mind composition effects.

A much less enthusiastic stance from Veronica Guerrieri and Charles Wyplosz. Guerrieri defends some of fiscal space should be saved in case of a recession (“save fiscal bullets”) and makes the point that the beneficial effects of fiscal expansion in a boom are not that lasting.

Upward pressure on interest rates from expansion will fade away as bonds change hands towards consumers with a higher marginal propensity to save. Rather directly “inject liquidity in the hands of those who need it in that moment”.

Wyplosz warns against “things that look obviously good”, says there is not enough evidence of secular stagnation (“five business cycles do not give a lot of degrees of freedom”)...

...He then points out that given the current interest rate environment, it would be good for governments to undertake productive investment, but politicians typically don’t go for projects with good returns.

Wyplosz deems the emerging consensus that all countries with fiscal space should take advantage of the situation and do good things for themselves and for their neighbors to be unrealistic. Wyplosz doesn’t exactly see any government building up debt to help their neighbors...

...Instead, these proposals fall on deaf ears and make (german?) people suspicious. Wyplosz also brings MMT voices in the US as an example of what happens when one puts forward “not careful proposals and then you lose control of what you want to say”.

Oh, he also said that another reason for caution are huge standard errors on fiscal space estimates. Using ""proper"" standard errors makes it harder to stand up and tell other countries what to do.

I got caught up in the discussion between the panelists (how do people live tweet these things??) but some interesting remarks: Blanchard talks about global warming. Also teases Alesina with the idea of cutting taxes under the promise of spending-side reforms in the future.

Blanchard also: Supranational rules have to do with debt default and demand externalities. EU rules designed w/ 1st one in mind, not 2nd. The 1st is now less relevant, the 2nd is more when monpol cannot be used. Changing the trade-off between the 2 should be the focus of reform.

Ok then the discussion went on, there was a lot of clapping, some more clapping and it’s a wrap!