Something I wonder about post-financial crisis policy framework in most DMs: Has New Keynesian consensus on monetary policy primacy been eroded by experience of the past decade or is it merely the proximity of rates to the Effective Lower Bound that has pushed focus onto fiscal?

I think the combination of both arguments has helped create at least the appearance of a consensus, but seems potentially to be a fragile one if/when the recovery is well underway. And fiscal sustainability discussions are already starting to percolate into mainstream discourse.

Shouldn’t impact policy in the short-term (though parts of the U.K. government still appear to be beholden to the penny-wise-and-pound-foolish Treasury View) but could cause some tensions down the line.

Guess I’m pretty relaxed about the NK view to the extent we’re talking about central bank independence/avoiding fiscal dominance. But it took thinking around fiscal policy to some deeply unhelpful places after the financial crisis - mon pol offset/expansionary fiscal contraction

One thing I think about is extent to which mon pol transmission is structurally impaired by distributional issues. We’ve seen how rate cuts have fed into widening wealth inequality but creeping issue of things like lower home ownership impacting collateral channel less discussed.

In the Eurozone we’ve now got a system of central bank actively subsidising the banking sector under dual rates framework. Early to tell, but so far not much compelling evidence that this addresses shortfalls in credit demand or credit availability for asset-poor HHs/businesses.

Once we get through pandemic, there will be loud voices calling for gvmt to “deal with the debt”. To the extent these relate to temporary support measures they should be ignored but there are other lessons from Covid on interaction btw weak welfare provision & public health risks

Lessons around the difficulty of launching effective labour market interventions with an increasingly casualised workforce. Lessons around chronic reluctance of government to use direct cash transfers to low income households driving stark differences in HH income trajectories.

Many of these go beyond just crisis response & speak to deeper failings in our institutional set-up. Some of the same dynamics that drove differences in income trends for wealthier households & poorer ones during Covid might also interact with broader demand deficiency concerns.

We have the scope to address these things now if there’s political demand to do so, & good news is that we’ve developed new tools that should allow us to use fiscal policy more actively to reduce severity of future shocks. But IMO case for active policy goes beyond stabilisers.

Anyway, idea of declaring “job done” on fiscal side if/when rates start to rise off the floor here seems to me to be a risk if we simplistically accept NK framework. We can do much better. & we should! Given all that has been lost over pandemic, we could use optimism right now.

Fin. Hope the above makes sense cc @sjwrenlewis @jdportes @SimonTilford @Claudia_Sahm @JohnSpringford @dsquareddigest