Morten Ravn's picture
Affiliation: 
University College London
Credentials: 
Professor of economics
Head of Department

Voting history

Deal or no deal: The Greece standoff

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Question 1:  

Do you agree that, on balance, the implementation of the agreement as outlined in media reports will have a non-trivial negative effect on Greek GDP?

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Answer:
Agree
Confidence level:
Confident
Comment:
Obviously without knowing the details, this is hard to answer. But to the extent that the deal involves higher corporate income taxes, higher VAT, and perhaps higher top marginal income taxes, the deal could further depress the Greek economy. Curbing early retirement and increasing pension contributions will instead have mild stimulative effects on the economy but only down the road and depending on exactly how pension contributions will be altered. It is disappointing that there seems to be no plans for further reforms of goods and labor markets which could help job creation. With youth unemployment shooting through the roof, it is pertinent that swift actions are taken to address the employment situation. This can only be done through making the Greek economy more competitive. I would have liked to see market reforms plus an attempt at emulating a fiscal devaluation but the latter is obviously only possible subject to a cut in public spending which appears off the table. It would also be good to actually check the extent to which past agreements on policy actions have actually been implemented. On the positive side, if an agreement is reached, which seems to be the case now, I would think that there is at least a short run positive effect due to the decline in the level of uncertainty.

Monetary policy and the zero lower bound (ZLB)

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Question 2: Do you agree that the benefits of reforming the monetary system to allow materially negative policy interest rates outweigh the possible costs?

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Answer:
Neither agree nor disagree
Confidence level:
Very confident
Comment:
Desirability is clearly the big question. As stated above, in principle there are fiscal policy options that should be considered as well. But, let's forget about those as they are apparently not to be considered. The answer to whether the benefits outweigh the costs depend crucially on the design of the policy. Some early proposals related to the inflation target. The argument was that a higher target makes a liquidity trap less likely. This might be correct. However, it comes at the cost of higher inflation when the ZLB does not bind PLUS at the cost of inducing a worse crisis when the ZLB DOES bind. Whether these two costs outweigh the benefits is an empirical question which remains to be answered. Another factor that has to be considered is the impact of the reform on the likelihood of which the economy is sensitive to expectations traps - self-fulfilling equilibria in which a wave of pessimism takes the economy in to a liquidity trap. some of the proposals may indeed leave the economy just as viable - or even more - to such expectational traps as the current monetary arrangement. At the end, I think a serious quantitative evaluation needs to be done before it can be determined whether costs outweigh benefits or not. Undertaking reform without such a serious evaluation risks implementing welfare detrimental policies.

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Question 1: Do you agree that it is feasible for the UK authorities to change the monetary system so that materially negative policy interest rates could be safely implemented? (In answering, you may wish to explain your reasons and define your view of 'material')

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Answer:
Neither agree nor disagree
Confidence level:
Extremely confident
Comment:
Let me start by saying that if the issue is simply that the zero lower bound on the short term interest rate is preventing policy makers to take the desired policy action, there really is no need to reform monetary policy as fiscal policy can be designed to implement the policy that would have been desired in the absence of this constraint. This can be done through a combination of a small set of fiscal instruments (consumption taxes, import taxes and payroll taxes) resembling implementing a fiscal devaluation. Moreover, there are monetary policy options relating to the choice of instrument that can be considered. Secondly, I find the question slightly confused in the sense that the policies proposed in principle can be implemented. It is in principle possible to circumvent the ZLB by switching to electronic money which allows the monetary authority to charge a negative interest rate. Variations of this are seen already with negative interest on bank reserves. The objections raised are not really about feasibility of such policies but about their desirability. Such objections may indeed be very valid and should be properly scrutinized, but that doesn't mean that the proposals are not feasible. If we stick to feasibility, the proposal of replacing cash with electronic money is perhaps the easier option. Stamping money seems rather costly and impractical while changing the conversion rate between cash and deposits seems less effective unless the liquidity trap is a complete surprise (otherwise households and firms may simply avoid making deposits).

The Importance of Elections for UK Economic Activity

Question 2: Do you agree that the outcome of the general election will have non-trivial consequences for aggregate economic activity (employment and GDP)?

Answer:
Agree
Confidence level:
Confident
Comment:
This will of course depend crucially on the extent to the different parties will pursue different policies which is still unclear. But, it looks likely that Labour will raise taxes more than the Tories and that the Tories will allow for larger cuts in spending than Labour. There is ample empirical evidence that shows that such differences in policies matter for the economy. Of course, if the outcome is yet another coalition government involving LibDem, the outcome will be less sensitive to the relative performance of Labour and the Conservatives.

Question 1: Do you agree that the austerity policies of the coalition government have had a positive effect on aggregate economic activity (employment and GDP) in the UK?

Answer:
Neither agree nor disagree
Confidence level:
Very confident
Comment:
I am not sure that the question is precise enough: I think the austerity policies may have triggered negative short run effects on activity but that the positive medium to long term effects are starting to show up now. A standard tax smoothing argument would suggest that the optimal response to a temporary shock to government spending - such as what followed the financial crisis - should be accompanied by a budget deficit. The coalition government chose to adjust government finances rather quickly. I think this might have had negative consequences in the shorter run but that the positive effects (relative to allowing for a larger increase in government debt and a later stabilization) are now setting in. It would have been useful perhaps to have considered a larger palette of policies (including money finance implemented for example through an adjustment of the inflation target) and a closer analysis of the extent to which the financial crisis may have implied semi-permanent effects on the UK economy. However, to return to the question: The austerity policies probably have had negative effects in the short run but positive effects over longer horizons.

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