Michael McMahon's picture
Affiliation: 
University of Oxford
Credentials: 
Professor of Economics

Voting history

Lockdowns and UK Economic Performance

Question 1: How much of the decline in GDP experienced to date would have been avoided in the absence of any lockdown measures or other policy interventions (such as fiscal support)?

Answer:
A small portion of the decline
Confidence level:
Very confident
Comment:
The timing and precise distribution across sectors may have been different.

Should the ECB Reformulate its Inflation Objective?

Question 3: Which of the following best reflects your opinion on the following statement? “The ECB should explicitly recognize unemployment and/or economic growth as a secondary aim, secondary to its price stability mandate.”

Answer:
Disagree
Confidence level:
Confident
Comment:
I think the current mandate in the Treaty is sufficient to allow concern for issues of economic growth and unemployment to be important in the decision-making of the ECB. The issue is that the flexibility around tolerable inflation is not clearly laid out so it is possible to argue price stability, the primary mandate, is not achieved unless inflation is tightly held around 1.6%. A symmetric target would allow more definite bands in which flexibility could be shown and attention shifted to the secondary mandate.

Question 2: Would you support increasing the ECB’s inflation target to a higher rate of inflation than the current 2% target?

Answer:
Neither support nor oppose
Confidence level:
Confident
Comment:
Here I am more nervous. It is clear that raising the inflation target, if credible, could build capacity in nominal interest rates and reduce the frequency of a binding lower bound on nominal interest rates. But I worry that announcing an increase when inflation is currently persistently low will not be credible and the move will simply increase the extent of the inflation shortfall. The ECB, or other central bank, would ideally be able to first show that they can get inflation up to a higher level, and then show that they can get it back to the existing target, before announcing the new target. Failing this, moving to a 2% symmetric target would be an improvement for the ECB in my view. As discussed above, the current objective is close to but below 2%.

Question 1: Which of the following best reflects your opinion on the following statement? “The ECB should explicitly state that it will allow inflation to temporarily exceed the 2% target following extended periods of low inflation.”

Answer:
Neither agree nor disagree
Confidence level:
Confident
Comment:
The issue is not that the ECB doesn't allow inflation above target; in a sense it is already able to do this and has had periods of its history when inflation was above target. The bigger issue is that the target is not 2% but rather the target it close to but below, with plenty of ambiguity about exactly what that is. So 1.8 is likely above its target, or, more precisely, above the definition of price stability to fulfil its price stability objective.

Will COVID-19 Cause Permanent Damage to the UK Economy?

Question 2: Which aspect of the economy poses the greatest risk for a slow recovery?

Answer:
None of the above, other, or no opinion
Confidence level:
Confident
Comment:
It is a combination of many of these factors and their influence varies over different time horizons. In the near-term, post-Covid consumer demand will depend on confidence in the authorities that it is safe to return to more normal activities. If this doesn't happen, it will exacerbate pressures on firms making it more likely that firms go bankrupt and workers lose jobs at a time when it my be difficult to get jobs in similar industries/roles. This could contribute to hysteresis effects. As the recovery takes longer, and depending on policy actions to support firms and households through this, the effect of indebtedness could become an increasingly important constraint on investment and activity more generally. Such debt problems would likely spill over into the financial sector increasing the likelihood of problems there with the possibility of a damaging credit crunch as a result. Even longer term, the effect of lost human capital will likely have a more lasting effect on the economy.

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