Michael Wickens's picture
Affiliation: 
Cardiff Business School & University of York
Credentials: 
Professor of economics

Voting history

Fiscal Rules in the European Monetary Union

Question 2: Which of the following is the one reform you would choose to improve fiscal rules?

Answer:
Re-nationalization of fiscal discipline
Confidence level:
Very confident
Comment:
Each country should implement the sort of debt sustainability rule set out in my answer to question 1. A fiscal council should then assess whether they are plausible. This would have the added advantage of avoiding fiscal federalism.

Proposition 1: The existing fiscal rules for European Monetary Union members require revision.

Answer:
Strongly agree
Confidence level:
Very confident
Comment:
The EU's fiscal rules are based on the Stability and Growth Pact. They are arbitrary, inflexible, inappropriate and based on an incorrect formulation of the problem. The correct criterion is that sovereign debt should be sustainable: i.e. governments should be able to service and redeem their debt. This permits much more flexibility than the EU's rules and covers all situations for countries whether in a monetary union, having a fixed or a floating exchange rate. The sustainability of the EU's rules is based on a deficit of 3% of GDP, a debt GDP ratio of 60% and inflation of 5%. None of these is either necessary or sufficient to achieve debt sustainability. Their only possible justification is that they are simple. To implement a debt sustainability rule governments should publish detailed plans which can be assessed for their plausibility.

Asset Prices and Monetary Policy

Proposition 2: Asset prices and financial imbalances are best addressed using macroprudential tools and left out of the monetary policy decision making process.

 

Answer:
Agree
Confidence level:
Confident
Comment:
See first answer. Best addressed? Yes. But this doesn't necessarily imply it is possible to do so effectively. For example, if a rise in house prices is due to supply shortages, monetary policy, which acts on mainly on demand, at best suppresses the problem and at worst would be ineffective. The Bank might have more success in influencing financial asset prices. A start would be to stop inducing portfolio substitution by keeping interest rates so low and by buying government bonds from the private sector.

Proposition 1: The Bank of England’s mandate should be officially modified to take housing or other asset prices into account in its monetary policy decisions.

Answer:
Strongly disagree
Confidence level:
Extremely confident
Comment:
The Bank's mandate should not be changed. It should still use interest rates to target inflation on the principle that the number of targets requires at least as many instruments. Adding an extra target - asset prices - would not therefore be consistent with this. However, there is no reason why the Bank should not be conscious of the effect on financial asset prices of its other instrument - quantitative easing. A further problem with targeting house prices is that it is a real asset and is affected by supply - which the Bank has little control over - as well as demand, which interest rates would affect. I would not be in favour of the Bank using interest rates to control housing demand as this is likely to be inconsistent with its inflation target.

The “Spend Now, Tax Later” Budget

Question 3: Which of the following best characterizes the pace at which the budget addresses UK’s medium term fiscal challenges (deficit and debt)?

Answer:
Just right
Confidence level:
Confident
Comment:
The main issue is the extent to which removal of lockdown will generate a large increase in activity. It is too soon to know. Therefore a later budget would have been better. In the meantime doing little is probably the safest course. In the longer term it will be necessary return to something like fiscal balance. With a strong bounce-back after lockdown and a longer-term framework, this could remove any need for tighter budgets. If the government had issued perpetuities then no tightening would have been required. Are the government missing the boat? As, soon, interest rates will rise making this strategy too expensive. Why hasn't the Chancellor ever discussed this option?

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