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.