💥My most important thread💥

Super excited to announce the launch of @NEF new programme of work #ChangeFiscalRules.

Also recently learn that @ojblanchard1 kind of shares our @alfie_stirling position!

Sharing thoughts on problems with fiscal rules and possible reform.👇👇👇
1/ According the IMF, “a fiscal rule is defined as a permanen
Fiscal rules are not designed to address the economic recovery from the Covid pandemic and the unprecedented challenges facing the EU; climate change, private debt, inequality etc. Fiscal frameworks should support (not constrain) the policy response to these challenges.
In 2015, there was 291 fiscal rules throughout 92 different countries– just under half (48%) of all countries in the world had a fiscal rule in place. All of these rules are numerical targets intended to be simple by design + focus on public sector’s balance sheet.
Of the countries with fiscal rules, 85% had a budget balance rule (aimed at balancing expenditure and income) and 83% had a debt rule (target for public debt relative to GDP). In total, 97% of countries with fiscal rules had a balance budget and/or debt rule in place.
According to the @IMF, the more frequent use of a debt and/or budget balance rule is because these rules are better suited at ensuring the sustainability of public finances.
When addressing longer-term structural issues, opposed to cyclical ones, fiscal rules tend to lead to an overly narrow short-term focus on reducing the size and risks to the government’s own financial balance sheet. Our paper @alfie_stirling
The overly narrow focus on government balance sheet and deficit, known as 'deficit fetishism', means policy makers become obsessed with alleged 'fiscal space'. And treats the government as completely disconnected from the rest of the economy (h/t @Frances_Coppola).
The Principal barometer for preparedness for a shock then becomes availability of fiscal space. Narrow focus on risks public sector balance sheet, leads to build-up of risks elsewhere - reducing our ability to cope w/ a shock (h/t @jdportes).
Another issue, fiscal rules are disproportionately focused on overly rigid and weak indicators of so called fiscal space. Fiscal space is complex- cannot simply be measured as a mere ratio public sector’s balance sheet to GDP. @PhilippaSigl

Fiscal space indicators aimed at solely measuring the government’s balance sheet tend to suffer from the streetlight problem: an observational bias illustrated by the person looking under a street lamp for their wallet that they know they lost somewhere less well lit.
The ‘streetlight metaphor’ depicts an issue of observational bias, where analysts search for
‘answers’ in areas that are easiest to look. The problem is particularly prevalent in measurements of fiscal space that use unsophisticated indicators most easily obtainable.
But fiscal space is determined complex macroeconomic dynamics (resource constraint, inflation, private sector’s willingness to spend/save, interest rates, debt maturity profiles etc.). The neglect complex macro dynamics means at least half the puzzle is missed.
Fiscal rules lack symmetry. They don't guard against under-borrowing. Whilst fiscal rules are designed to mitigate the deficit bias - they do not safeguard against the proliferation of political dynamics that causally flow in the opposite direction (deficit fetishism).
We are fast approaching unprecedented challenges where a bias against government borrowing and the resulting under investment today comes at a higher opportunity cost (both financial, social, and ecological) in the future.
Fiscal rules are also not fit (never were) for current context, especially the Knightian (fundamental) uncertainty and low interest rate environment. CBs wont hit inflation target if austerity (spending cuts) pushing in opposite direction.
While the EU's fiscal framework may have been designed to help unite the EU - the fiscal rules in their current form, or any form based on the underlying approach (deficit fetishism), could end-up dismantling the EU (h/t @katie_kedward). Think about it for a min.
So in sum, totally agree w/ @ojblanchard1 we should abandon fiscal rules, and replace them with fiscal principles based on an evaluation of different macro-economic dynamics - that sufficiently offer policy makers discretion to tackle today's biggest challenges.
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More from @Frank_vanlerven

14 Oct
🗣️Thread Alert🗣️

The @ecb preseident madame @Lagarde drops yet another 💣BOMBSHELL💣on the market neutrality principle.

Twitter-review, especially in context of green transition and role of the ECB as a market-maker and shaper. FYI @Isabel_Schnabel
A guiding principle of the ECB’s approach to monetary policy is the concept of ‘market neutrality’. In terms of the Corporate QE programme, the ECB perceives and chooses to implements this principle by buying bonds that mirror the composition of the eligible bond market.
This conceptualization/implementation of market neutrality leads to a carbon bias, as capital and carbon intensive corporates - which often require large amounts of finance – are over represented in the CSPP list of eligible bonds. (A paper coming out on this next week)...
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4 Sep
☝️Thread🤓: What do conventional macro econ textbooks say about the role of 'fiscal policy' during normal times?

Why I agree with @NathanTankus. When the economy is "in balance", mainstream approaches suggest monetary policy must dominate and fiscal policy remain passive.
According to mainstream macro econ textbooks - and conventional approaches embodied by e.g. IMF, WB, OECD, WTO, TROIKA, most central banks etc. - in "normal times" fiscal discipline must be maintained, national debt remain stable - ⬆️deficits/debt will reduce long-term growth.
On this basis, fiscal consolidation in 'normal times' is often prescribed as a necessary remedy to guarantee long-term prosperity, sustainability and economic growth. Fiscal discipline must be maintained to anchor expectations and prevent unnecessary inflation. And b/c:
Read 18 tweets
21 Aug
Thread-QE & Inequality: Time for the @bankofengland to come clean?🤬

I had to do some research on the distributive effects of QE and so thought I would share thoughts.

Key message - absent a fiscal stimulus, QE will have distributive effects. The Bank should be open about this. Image
I should caveat that I do think the UK is lucky to have one of the most progressive central banks in the world. And I have had very positive engagements with them since joining @NEF NEF.

But I have found their position on the distributive effects of QE especially quite dubious.
For example, in an excellent article for the @FTAlphaville, @TomHale_ wrote about a particularly striking speech by Deputy Governor Ben Broadbent in 2018, which very much exemplifies the @bankofengland's stance since. Where Broadbent said 👇👇👇 Image
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9 Apr
The @bankofengland has today announced yet another measure - the extension of the ways and means facility...

But WTF does this all mean?

Here are some thoughts and tools that might help on what the BoE is doing and the implications...
In our working paper, @jryancollins and I develop a typology of forms of fiscal-monetary coordination that includes both direct and less direct forms of monetary financing, illustrating this with case-study examples. ucl.ac.uk/bartlett/publi…
(We also review holdings of gov debt by central banks+commercial banks as a proxy for fiscal-monetary coordination. We show it is often neglected that many central banks successfully supported industrial policy objectives, managed public debt w/out excessive inflation).
Read 19 tweets
6 Apr
Had the privilege of being on @LBC with @NickFerrariLBC. Here are 3 things I to say about @hmtreasury CBILS scheme:

1) Badly designed
2) Assumes banks like lending to business
3) Relying on firms to take out more debt will make them less resilient
To recap, as @MikeCherryFSB head of the federation for small businesses @fsb_policy put it, the #CBILS was the government's promise to offer interest free, fee free, government backed support from banks.

But last week it became clear the programme was failing, BIG TIME...
By last Thursday 2nd of April on 938 out 130,000 CBISL loans had been approved. In face of the biggest economic collapse on record, that is only 0.7% businesses were getting liquidity they applied for...
Read 11 tweets
5 Mar
Super interesting piece by @MESandbu - one that I had been wanting to write myself for some time. Everyone should read...@UliVolz @adam_tooze @despresmorgan @JoMicheII @jryancollins

I approach very similarly, wanted to share some additional thoughts...

Martin very accurately refers to two different types of approaches to central banks and climate change (my interpretation is as follows):

1) Integrating climate risk into central bank operations
2) Pro-actively use central bank tools to realise Paris Climate Agreement
Point 1 is very hard for any CB to disagree w/ not least b/c directly contravenes Paris Agreement. CBs should not be holding risky assets on their balance sheets, either through asset purchases or collateral frameworks. See excellent paper @Pierre_Monnin

Read 10 tweets

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