 So good afternoon, everybody. I think it's time to start. It's actually very unusual at such a conference that everybody is there already a couple of minutes before. But I must say, I know what the reason is. And the reason is sitting next to me. So I very warmly welcome all of you to the keynote lecture by Olivier Blanchard, which certainly is one of the highlights of our conference program. And it's a very great pleasure for me to share this lecture and to welcome our keynote speaker. Of course, Olivier needs no introduction, but let me just say he's a senior fellow at the Peterson Institute for International Economics and the Robert M. Solo Professor of Economics Emeritus at MIT. And of course, Olivier is one of the most respected economists of his generation. His influence derives not only from his broad and profound academic work, his brilliant books, including most recently the one on fiscal policy under low interest rates, and his involvement in policy institutions like the IMF. It also reflects his ability to shape policy debates through contributions to current discussions, helping decision makers to identify the economically relevant mechanisms and trade-offs. And this year's conference on fiscal policy and EMU governance at the ECB takes place in challenging times. Actually, it seems that the challenging times are on every end. So the ECB has been facing the fastest and largest increase in inflation in the history of the euro area, to which we have responded with the steepest ever hiking cycle. Inflation has come down rapidly, and we are now facing the last mile of the disinflationary process, which according to our staff projections will be more gradual than the initial rapid decline. At the same time, EU finance ministers are working on finalizing the reform of the EU's economic governance framework with the potential landing zone gradually taking shape. A finalization of the economic governance reform is of great importance for the ECB as a credible and enforceable fiscal framework supports monetary policy in maintaining price stability and also protects our independence by guarding against the threat of fiscal dominance. In today's lecture, Olivier is going to speak about fiscal versus monetary policy as stabilization tools. The roles of and interactions between monetary and fiscal policy have been the topic of an active debate in recent years when the respective roles were changing due to rapid shifts in the macroeconomic environment. In the years before the pandemic, when inflation was persistently below target while monetary policy was constrained by the effective lower bound, it became widely acknowledged that accommodative monetary policy on its own may not be sufficient to bring inflation back to target. At the effective lower bound, monetary policy needed support from discretionary fiscal policies that would increase aggregate demand and thus inflation. But it was only with the onset of the pandemic that monetary and fiscal policies started to pull in the same direction, reinforcing each other. The combination of a strong fiscal response at both national and European level and a forceful monetary policy response proved highly successful in lifting the economy out of the deepest contraction since the Second World War and in preventing a downward spiral of prices. However, these large scale policy interventions coincided with a broad shift in the macroeconomic environment. Constraints on production meant that supply could not keep up with demand, putting upward pressure on underlying inflation. Russia's invasion of Ukraine fueled price pressures further pushing euro area inflation to double digit levels in October 2022. Some argue that an overly expansionary untargeted fiscal policy played an important role in the sharp rise of inflation while at the same time posing a risk to fiscal sustainability. And the ECB has repeatedly called on governments to roll back the support measures related to the energy crisis in a timely manner in order to avoid fueling inflationary pressures and counteracting restrictive monetary policy while focusing on measures making the economy more productive and strengthening the supply capacity. And in light of this recent experience it will certainly be fascinating to hear Olivier's view on the role of fiscal and monetary policy in stabilizing the economy. So Olivier, thank you so much for being here. The floor is yours. Thank you, Isabel, for the very kind remarks. Not the title of the slides, which is its thoughts. I think a more honest title, but would not have worked here, is half-baked thoughts on fiscal. It's basically ideas I have, which I have not worked out totally. Typically actually the giveaway is that if somebody comes with a PowerPoint presentation rather than the latex or Python presentation, you know that they haven't quite done the work yet. But I hope that I'm going to be, as you might expect, a little provocative. And I hope that there are some ideas there which might trigger research on these issues. If I know how to turn this, we will be good shape. Maybe the clicker. Or maybe the clicker. This way, this way. Not the other way? That's fine. No, the right one. Okay, just. Let's hope. But we succeeded. So let me give you the bottom line, which is ignoring political economy and governance issues. That's a gigantic ignoring. But that's the starting point. If you just look at what fiscal policy and monetary policy can do, my conclusion is fiscal policy has more tools, better tools, more targeted tools than monetary policy to stabilize output. The issue is the next line, which is, well, unfortunately, political economy and governance issues matter very much. They were discussed earlier today and they're absolutely central. So the question is what to do? I mean, there's this potential set of tools which look quite useful, but clearly they can be misused. So the first part will be about that. The second part is about no magic solution. I don't have a magic solution, none of us has. But two directions in which I think there can be progress both at the research intellectual level and then maybe at the policy level as well. So the first one is clearly a lot of the problems of fiscal policy comes from its discretionary aspect, which is, you know, governments do what they want. And so the idea is maybe we can use stabilizers more, automatic stabilizers. They came into the discussion already today. Truly automatic stabilizers, you don't have much choice. This is what is already there and it's not going to be enough. But quasi-automatic stabilizers, which is automatic stabilizers which are triggered by some aggregate measure crossing a threshold or even as a function of some aggregate measure, look like something we should be looking at to the extent that some of the policy can be done this way. What I've concluded, this is for me kind of an old topic. I think every time I go back to, I realize that as most things it's harder to use than it sounds and I want to indicate some of the issues, but also push for trying harder to see how they could be used. The second is in the end, a lot of fiscal policy is still going to be discussionary. And therefore we have to deal with the dangers of that, namely the possibility of that explosion or that unsustainability. And here I think as a result of a discussion of fiscal rules in the EU, which is not settled yet and might not be the outcome that we all hope for or some of us hope for, I still think that there has been tremendous intellectual progress in thinking about what does it mean for that to be sustainable, how can we actually check it and what can we do to make sure it happens. And I think again here the debate has been largely among policy makers in the commission. I think commission has done a great job, but I think there are issues which are much deeper and that research could help for. So let me then just plunge. Okay, so why is it that I think the standard view is well, if there are fluctuations, my entry policy should take care of it. And I think it comes largely from the influence of conceptual model. We need models to think about the world and one has become very standard in our mind in central banks, research departments, which is what I would call the NK New Keynesian Mall, the plain vanilla version of the new Keynesian Mall. And that mall basically there's one distortion which is nominal rigidities. There's a half distortion which is that to get nominal rigidities you need price setting and therefore you need monopoly power. So this is the second one that plays a minor role. And then you have preference shocks, you have productivity shocks. And the conclusion of that, which is nearly one line, is well, if you can set the interest rate equal to the flexible price outcome, interest rates which would prevail on the flexible prices, then you're done. And then if you actually want to go to first best, you remove the monopoly markup for tax on monopoly profits and you actually get to first best. That's an incredibly strong result. It comes in the simpler malls with what Jordy, Gali and I have called the divine coincidence, which is that basically if you try to maintain inflation stable, then you'll maintain output equal to the natural level. And so you basically kill two essential birds, two big birds with one stone. In addition, nobody can object to the notion of stabilization and therefore this is not a big political issue and therefore you can give independence to the central bank, something you couldn't do if you were discussing redistribution, that can be independent. And so we all know that mall, we go up with it. Again, I think it's a very powerful paradigm and it has had a lot of influence. We all realize that it is too simple, but we start from there to a large extent. And so this gives an absolutely central wall to monetary policy. Now again, there are all kinds of extensions which with various caveats, I mean the hack malls, the heterogeneous consumers mall, show that when you use monetary policy and people have different levels of wealth, then you're going to get distribution effects when you change the interest rate. And so there's a wall maybe for fiscal policy, but at least in the papers that I know in that literature which are very nice, the role for fiscal policy is not stabilization. It is redistribution, you do stabilization, you get some effect which you don't like about distribution and you redistribute and fiscal policy is used in that way. So it's very much a second line rather than the first. Now my point in the next, I think two slides is that that mall is very nice and I think it was a good idea to start with one distortion and I think nominal rigidities to me is at the top of the list when you want to think about short run, but there are many other distortions and they make complex shocks. And so it's very easy to design cases and relevant cases in which fiscal policy can do better than monetary policy. Again, I mean knowing the political economy which I'll come back to just if we have the tools and we can use them right. And the reason is very simple. It has a near infinity of tools. I mean all kinds of taxes, all kinds of transfers. It can play with income effects, with income tax. It can play with substitution effects by using, you know, changes in the VAT for a while and so on and so on. So just by the fact that it has many more tools it can basically target the issue much better. So I have two examples. The first one on this page is trivial but not irrelevant. So take, you know, this big shortcut which there is a proportion X of hand-to-mouth households they basically consume the income no more, no less. So these people clearly have zero interest elasticity. Now that's an exaggeration. The world doesn't have so many people exactly like that but the fact that there is a good part of the population which is probably interest rates are insensitive. In this case it's fairly obvious that monetary policy is not going to work great because there's a large group of people who basically will not be affected. They may be affected in the second round and so on but it doesn't seem right. Physical policy on paper again can do exactly the job which is it can give the money if we think that there is deficient demand. It can give the money to the hand-to-mouth households and then they'll spend it and their marginal propensity to consume is one in this particular example. And so, you know, it will work. It will help them. So if you care about distribution, great. And it will help the economy. So in a recession, you can basically do an income tax cut in general but you could target it making more granular and, you know, give a particular group the tax break that you think is needed. Now, is this a magic solution even in that context? No, I mean when you do monetary policy you don't have much legacy stuff. Once you've done it, it goes it past. There is no state viable except if you have hysteresis or something like this. There's no state viable. You start from scratch. Where in the case of physical policy you have legacy debt. When you have a deficit, you have more debt. Now, how costly it is is this enormous issue which is it depends on R minus G. So if R minus G is positive which is kind of a textbook standard assumption and so on then yes, I mean there is a cost and you have to pay but you succeeded in doing exactly the right thing in the short term and probably offsets whatever you have to do in the longer term. If R minus G is zero then, you know, as a matter of arithmetic then the cost of debt in that sense is basically zero and there is legacy debt but it's not a big deal. So a second example, let me drink something is kind of directly relevant then it's something that we saw in the last two or three years which is you have an economy which is hit by an adverse supply shock. So say a one-time payment energy price increase so it's a one-time growth effect but it remains higher. It's kind of a step increase. And then, for the rest, firms markup of a cost they're Dixit Stiglitz type firms they have a fixed markup they just increase the price because the cost of producing is higher and there is real wage rigidity on the workers side and it's not real wage rigidity forever it's real wage rigidity and here I take a trivial and clearly incorrect way of doing it but it's easy. So if it takes x period maybe a year or two for the workers to accept the cut it just takes time. That's what we see in the real world there are variations in productivity and eventually real wage is adjust but it doesn't happen happily right away. So suppose this is the context. Well, you can use monetary policy and you should but it is not a pleasant exercise the firms are going to increase their price given the increase in the cost of energy the workers are going to react by asking for an increase in nominal wages because of real wage rigidity the firms are going to pass the increased cost of labor to the price the workers are going to do the same thing and for the x periods during which workers don't accept the cut you're going to get more and more inflation now suppose that long run inflation is not fully fully anchored and you have two or three years of higher inflation because you have to do it then there's an issue which is that there's going to be a long run effect people are not going to believe your target so the optimal monetary policy I'm saying in words what you have all seen in equations is going to be to accept some inflation but accept some unemployment as well because you want to basically make sure that workers don't ask for too much and that's going to be the optimal monetary policy and it's nothing pleasant to look at but that's what we face now if you think about fiscal policy and again that's not a hypothetical because we see countries which have done things like this if you think that it just takes x periods for workers to adjust then you basically can compensate the workers for the loss of real income just give checks for x periods so that their real wage of their real income doesn't change and then by then they have accepted the fact that the world is tougher and they have to accept the wage cut but you've avoided basically this fight between the firms what's known as conflict inflation of the wage price spiral and you have a first round effect and prices of energy go up but you don't have second round effect which makes it much easier to deal with and then that's it now there's an even better way of doing it at least on paper which is that you actually avoid the increase in the price of energy for consumers you go directly with a subsidy on gas so consumers don't see anything and then there's no even the first round effect inflation doesn't increase because nothing has happened from the point of view of workers nor from the point of view of firms I'm assuming here that consumers are using energy otherwise you give checks to both firms and workers and in this case you have no inflation on paper again now again it's completely extreme but it is not crazy France for example many countries went the first way France went the second way to a large extent and the increase in inflation was substantially smaller and in other countries now whether this is a major benefit or not we can discuss but workers didn't see the same decrease in purchasing power than they would have seen so I'm not saying this is the way to do it there are a lot of reasons to worry about some of the effects but it shows how fiscal policy can basically do things that might be a policy just cannot do and I have taken this example because it is relevant but I can think of 10 other examples where this would happen if there is an issue in the construction sector you might be able to do something there rather than use the interest rate and so on and so on so again because nothing is ever white or black the first thing is that when you start thinking this way you have two goals which you are not careful one is protection so you give money to households so that they can buy gas at a reasonable price you give money to firms because otherwise they will go backward because of liquidity issues and so on that's one it could well be that the sum of what you want to do for protection is much larger than what is needed to maintain and agigate demand and that's exactly what happened in the US which is it became a Christmas tree everybody put some protection measures and the result was a package a fiscal package the ARP which was probably twice as big as it would have been justified two times or three times bigger but it was justified by the macro considerations so you really have to think about both and if you're going to be very generous with protection maybe you want to increase taxes elsewhere but the risk is if you start thinking this way there is a risk that you just make lists and then the result is not exactly what you what you would like the other thing is again I would all put it on the list which is once you've protected workers for X years in X plus one they say why not X plus one you kind of like it now if a shock is gone which is not my assumption that's fine and with respect to truly temporary shocks it's fine but if it's not then you have to say no sorry guys and we're seeing this I'm seeing this again in my home current home country which is France basically people are saying no no this program has to continue because it really was useful it protected people, decreased the poverty rate and so on so getting out of it is not obvious and then again you have the issue this leads to higher deficits and we've seen that and again the cost depends on R minus G if R minus G is positive there is an issue my sense is again these are more complex tools sophisticated tools than the interest rate but they can do things but they are dangerous to use so has it worked I think there's a paper at the IMF by Pierre-Yves Gouache and somebody else who says yeah to some extent it has I think it's too early to tell but again the point is the general point is many tools and I think nobody can disagree with that I've just given two examples of that last slide on why fiscal is better than money when I presented this very early version of these views at CPR and Monsieur Villeroit Gallot was my discussant and he thanked me for allowing him to take leisure and closing the central bank I'm not going that far but again the argument is might we policy is useful but fiscal surely can be useful as well so let me just list things that you probably all have thought about might we policy so we will have I would say one and a half instrument the standard one policy rate and then the half leaving aside financial stability is QE of some sort and I think there are issues with both you know the old one with respect to the policy rate long and viable lags and I'm sorry to say but I think we seeing this again is a discussion of how much is in the pipeline how much is going to come out and slow down demanded bias margins if you have fixed rate mortgages it takes much longer if you have flexible rates it may be too strong and so on you have a zero lower bound that you happily exited a while back but I would bet you will not revisit at some point and then on QE again this would be a gigantic discussion but it seems to me that you probably got one percent less on the long rates with a lot of complications I wouldn't say negative collateral effects but a lot of implications for the financial system it's not a very clean tool again it's not in terms of targeted tools it just has effects all over the place the last one I've added because I have these discussions with my sometimes co-author and sometimes disagreeing co-author Lai Somers and he argues that we've moved to a world of services where basically the interest elasticity of aggregate demand is getting smaller and smaller I think there's some wisdom there I don't know how strong it is but it is an issue the on the fiscal policy side again we haven't used all these instruments so this is more theoretical than empirical but you clearly can play various games games in the positive sense you can do intergenerational transfers you can basically decide that this is really a crisis and you have to have future generations participate in it and therefore you do intergenerational stuff by doing deficits and that that's the margin that my trip policy does not have you can play with income effects you can play with substitution effects I think there's a really interesting discussion so income effects I would say unemployment benefits some intertemporal effects but no to a first approximation it's income cash for clonkers which is basically a gift for turning your car in when it was an old one to stimulate the demand for new cars is clearly something which plays at the substitution margin the temporary that decrease is playing mostly at the substitution margin as well so you again from a conceptual point of view you really have a lot of margins to play with the last point is as opposed to my trip policy and that's a discussion I've had with Roberto and other people my sense is despite the discussion this morning by Roberto and others multipliers are much more reliable than the distributed lags now my multipliers are all over the place but because I think they correspond to different experiments you don't have the same multiplier if you give money to the rich to the poor so on and in the recession not in the recession but if I give money to the bottom to the entire of the population I'm fairly confident that other a period of one or two years they will have spent it now they see uncertainty about the second round effects and so on but you know compared to the effect of the interest rate I think we would all agree that it is better so I think all these fonts you know if again if the issues that the political issues were not there these are clearly the tools that we would like to use so now let's move to the second part of the story so the first line is again I mean if we had a benevolent technically competent dictator which is the if you know you do fiscal policy not all the time you do monetary policy as well I mean let me just say something with respect to a target inflation that something fiscal policy cannot do so even if you do everything that I want in fiscal it still is the case that the central bank has to basically make clear that they are committed to 2% or whatever number they want to choose that is not the province of so if not if these things are not true if there is no dictator which is a good thing if he is not benevolent which is likely if he is technically incompetent which is highly likely then you know you have to use I think you have to use monetary policy which is the reason we do it again it has a clear mandate inflation if the divine coincidence is not so there is very good approximation to reality it is also a mandate to stabilize so it is widely accepted that something which can be delegated we go back to the question of delegation that is something which can be delegated because you know nobody is going to object to stable inflation nobody is going to object to a fairly stable unemployment rate or something like this so I think it can be given independence and then we hope for the best but it seems to work quite well challenges of fiscal policy and again there is a literature far beyond what I could talk about there is a deficit bias we have to accept it elections come fairly often there are wars of attrition which is you know we are seeing now this in Washington very clearly there are political lags which is even if you agree the details are complex it takes forever to agree and so on once it is implemented it can happen fast so you know the interaction here is the more tools you put in the toolbox the worse the Christmas tree which is now there is some lobby which is going to say oh but we have a great tool to help you know the chocolate industry because it is really doing badly and if you have only one tool I say sorry guys I don't do chocolate but if you have a set of tools the risk is there and again I would read ARP in the US as having done this on a terrible scale so there is no simple solution but and that is going to be the second half there are I think two directions to explore none of them complete solutions but I think that if we made some progress and convince policy makers to do a bit more of it it would be good so the first one is making more fiscal policy automatic the second is putting in place rules which given that there is going to be some discretionary part maintain that sustainability so the next few slides are stabilizers so there is a lot of work not normative which descriptive work on automatic stabilizers there is a set of papers at the IMF when Vitor was there which basically has looked and it does some job I mean the fiscal stabilization coefficient varies from point two to point six in the set of countries that they were looking at but it's entirely a function of things that have nothing to do with the goals of stabilization policy it has to do with mainly with the size of government if you have a government which is 60% of the economy then the revenues are big the effects are low it has to do with the progressivity of the tax system it has to do with the generosity of the employment benefits and so on it's completely arbitrary and we have accepted that however and we just say okay automatic stabilizers get a pass but they come from nowhere they are useful so let's not get rid of them but we'll accept the status quo so a way to make progress and decrease the political lags and so on is to basically do quasi-automatic quasi-automatic means that you have some aggregate measure can be unemployment, can be GDP or it can be GDP growth and then when you go above it then something kicks in or you can have a function but it's harder as your employment increase you do more and more so for example in France now we have introduced I mean it exists in the US you have longer unemployment benefits at the state level when the unemployment rate exceeds some level in France we've introduced the same thing which is if we get above some unemployment level your unemployment benefits are even higher or longer I don't remember but more generous and then if we're below their last and this you can do I mean it's not as automatic in the sense it depends on measures which are not not perfect but I think it's still a good way of thinking about it now having argued for it I want to argue for why it's hard so I think I have three points the first one is cold which is the first thing is what can it not do and I think when we've lived maybe as a result of listening to Sims and people like this too much we've been thinking of fluctuations as business cycles they come, they go it's fine I think what we're seeing in the real world is something much less ergodic in we have these fluctuations and we have to deal with them and then there are these exceptional events you know the one in a hundred years type events which happen every 15 years these days which are incredibly hard to anticipate and are incredibly specific in their form so the global financial crisis had many dimensions that none of us thought about I was you know at the phone with it or at the time and I know COVID again was such a different shock so in those is no question automatic stabilizers are irrelevant so that's going to be discussionary and one issue is that these events are not positive events they are always negative ones which is of some relevance if you care about that sustainability and they are asymmetric in a fundamental way but let's take kind of standard fluctuations with stuff that you know we do we assume in VARs some kind of ergodicity or stationarity in the simple models we have one shock in fact there is a very large number of shocks sometimes it's a construction sector which has a bubble and then it drops and then that's a source sometimes it's people getting very worried about some election cutting spending or it can be all kinds of things so the question is do you want to have a set of stabilizers aimed at these various things or is it more reasonable to think that you just want one or two which are not going to be as targeted but maybe simpler to use my sense is the conclusion is ten minutes seven minutes I should be okay the I think you have to give up targeting for something which is widely agreed but more targeted ones are going to have distribution effects and that gets to should it be automatic or a political discussion and I don't think you want to go over it so in the end I would say you down to two income tax and maybe consumption tax VAT change a permanent VAT change has no effect but temporary one has okay let me move on the trigger so automatic stabilizers stabilize but they don't stabilize the right thing they stabilize output or they stabilize unemployment mechanically they stabilize the output gap of your employment gap so if you have an increase in unemployment and you have to decide is it a change in new star in the natural rate or is it a change away from natural you want to react to the second not to the first because the first one is likely to be permanent so if you react you're going to react incorrectly some of the time so what you want to do is use a variable you basically have a choice between output and unemployment realistically if you want to choose you have to choose a variable where the star one moves slowly and going back to the old work with apologies Blanchard-Croix what we found I re-estimated it what it shows is that if we look eight quarters ahead at the unexpected movement for output only 11 to 25% that depends on the trending is due to transitory shocks most of it seems to be permanent right where for unemployment much more of the unemployment is transitory so if you're going to choose one choose unemployment as the trigger but again one can think much more the last point on that is that neutrality now you say okay so I'm going to make it symmetric if an employee is above that if an employee is below that I do minus that that's not good enough in a world in which R minus G is positive you have to do more later in order to basically undo otherwise you get a non-stationary component which keeps which keeps building up so you need a feedback rule which is if I've used unemployment benefits a lot then I have to be more austere and the formula that it leads you to is that so X is the automatic stabilizers in the last X to last line you want to make it a function of U minus U star estimated so you want to do Kalman filtering or something like this do we estimate U star so that in the end if it was a change in U star this term goes away you don't do unemployment benefits if it's a change in U star then you need some feedback very much like the born rule for fiscal in which I can relate it on unemployment benefits but that do to accumulate it on unemployment benefits feeds back if you spent a lot you have to spend less and again the question is on paper I can write that rule now politically can I write something which works I'm less sure but it seems to be worth thinking about two slides I think okay sustainability so again there's going to be a lot of discretionary there's going to be a lot of deficit bias there's going to be so can we put in place rules which make sure that that doesn't explode and that is sustainable that's to me these are synonyms and can we do this without constraining a useful part of fiscal policy too much and that's very much as Louis will know that's very much the current debate which is okay it's very easy to put a rule just that not above 60% no matter what that works if you can but it's crazy so the question is can we do so I think automatic stabilizers are good because you can design them but they are neutral but discretionary is an issue and then you have these exceptional shocks which are always one sided so I think the discussion of fiscal rules at the EU level largely at the commission has been incredibly productive in showing how to think about it I think this is major progress from outside of academia but extremely useful now how do I see the progress the last slide is conclusion the so let me start with a definition which you may or may not agree with which is I say that is sustainable but it is expected to converge to a stable that ratio with high probability right so it can converge to something higher than today but it has to be kind of concave as opposed to convex in which things go worse and worse as you look further and out further out another way of saying this I think the trajectory matters more than the level and then there is a fascinating issue which is does the level matter and there again that's a whole discussion we know empirically that countries can get away with 150 Japan more than that so we know that there is a large range where it doesn't seem to matter very much at the theoretical level that matters because the higher the level of that if R-G is positive then you need a larger primary surplus which is politically costly and you may not be able to do it so there is a higher chance that you let it go there are various issues given the time I don't have time to talk about it I think that again focusing on level is wrong focusing on trajectory is right but there is still some desire to put some effect on the level let me go fast because of the time how do we do this so I think what the commission has introduced which is this thing called probability analysis which is taking into account things which are likely to happen in the future plus uncertainty is the way to go it's incredibly hard not because harms with the pathology but because the future is uncertain and so I think the uncertainty is genuine and you have to take it into account but just to remark if you leave out the S and you just look at the DSA so the one with expected values it gives you a good sense of where the country is going and if it's going like this with the DSA you have to worry so I think that this is an incredibly useful tool then I'm going to pass how do you implement this what intermediate target you ask governments to commit to and so on the point I would make is is it sufficient the German worries about the lack of numbers hard numbers I think is not wrong I may choose maybe wrong but the lack of numbers is an issue can we find and that's the current discussion in Brussels can we find sevgas which are reasonable or not I think that people like Jeremy and others have worked on it but I think there could be more academic work on it and find out what the tradeoff is enforcement is the essence so I'm done conclusions there are many people in this room sorry Isabel you would like to make your job easier there are many potentially useful fiscal tools there's more room for for automatic stabilizers but there's a lot of work to be done before it can be done in practice and we've made progress on that sustainability I suspect it will continue I suspect people will not be happy with the rules as they come out but again most of the work has been done at the policy level of a think tank level not at the academic level I think there are plenty of things to do there which would be tremendously useful thank you thank you thank you so much Olivier for a fascinating presentation I think Philippe and I we're not unhappy if we have less work to do so I'm happy to open the floor for discussion we have around 15 minutes Philippe thank you very much a fascinating talk indeed just one question on the setup of this quasi automatic stabilizers you said they are a good thing to have but then you find limits in scope in the trigger in the debt neutrality thing wouldn't that logically then call for an independent institution to take care of that it's very equivalent to the independent central bank where you have very tricky issues in theory you can always think of an algorithm to replace Isabelle and Philippe but in practice it doesn't work so you go for an independent agency couldn't you think of an agency which takes care into sustainability issues and of stabilization issues in the same way collecting is an easy way of not answering some questions so I prefer to be stuck with a question yes my sense is if it's quasi automatic there's not a whole lot of need for an institution but you're raising the issue of is the rule the right one who designs the rule and probably the rule has to be designed by technocrats maybe it's an independent institution once the rules are in place is there a need for yet another institution on in the part of the slide I didn't talk about I mean it's clear that national fiscal councils should play a major role in assessing that sustainability because this is an exercise where you have to take hundreds of decisions as to how you look at the world in this one I would hope that and take the French example in which we decided to have less generous unemployment benefits if your employer rate goes below X I don't see much point in having an institution of that it's done if we get to more complex rules maybe there should be somebody who looks but I don't see the symmetry I don't want to create another central bank I think it's less needed and the idea is really automaticity to the maximum extent thank you thanks it was so interesting I missed some reference to the constraints that the fiscal policy has in particular to the working of the markets and and also whether we could decompose this aspect one aspect is distribution policies or social policies that I think countries should be able to do whatever they want but to the margin that this has affecting fiscal consequences might be in the case of the union to everyone and that's when sustainability comes in for example so in the same way that you meant to think what you were saying well it's easy to delegate the monetary policy because it is an agreement in some sense we also want to say that it is on the fiscal side because we have the way to be sure that doesn't interfere that is either addressing some inefficiencies or some social policies or whatever that is whoever is the voter the size that they want to do so yes well there are various constraints on fiscal policy and I just finished something yesterday on the speed of adjustment that you can ask a country and there are political issues and macroeconomic issues markets I think one of the great advantages of the SDSA and its publication and its assumptions and its discussion is to actually inform markets so that they don't have to do the work themselves and it's done and so I think that in effect you know I didn't talk about the enforcement mechanism but I would think that putting in place the SDSA which is convincing which is well done which says this is how it looks would send the message to the market and that I think in the end will be the main enforcement mechanism with respect to so I'm not sure I got the last part of your question but it seems to me that everybody again we can delegate things in which there is nearly total agreement and then there are things we cannot delegate because if you want tax for rich then the rich don't want that so the question is what about the automatic stabilizers they really try to stabilize the economy nobody is going to strongly object now that's kind of the first order response the second order response is well if you do this for say deficits then you're making an intergenerational choice and maybe there is disagreement as to how much we want to leave to future generations and some I don't think parties think in both terms but you could see one party saying no no we have to finance it now and another saying our kids will pay for it so when you go beyond just stabilization where I think there is wide agreement it's true that any measure you take is going to have some intergenerational implication I think there is a trade-off here I think this is second order then I'm happy with having outside the political discussion does this thank you okay five more speakers on the list but then I think I have to stop I'm sorry so I think the next one was Leo so thanks really a lot for this brilliant presentation given that we are here at the ECB can I ask you to clarify your remarks that monetary policy has one and a half instruments monetary policy has one and a half instruments the half instruments being QE now given that QE really is so critical for this intersection of monetary and fiscal because essentially what we do is we replace in the hands of the private sector long-term government debt in exchange for central bank reserves so what is your view on the effectiveness of QE in general advanced economies feel free to comment on the ECB as well so I'm going to make to give you a flip answer which is not right which is QE changes the maturity of a consolidated debt Treasury could do that if this was the issue now what it cannot do is issue a very short term but it can issue a very short term so the question is who should do it Treasury may be more constrained but it's not obvious to me that it is it seems to me that again we can think of QE as a fiscal operation and maybe it should be left to the Treasury I don't know if this is a discussion you've had but it's a bit different to the your level than a given country but conceptually it is basically a change in the maturity of an outstanding debt not obvious that the ECB should be doing at all any central bank now again we understand that there are many other reasons to provide liquidity which has to do with financial system aspects but from a purely monetary policy point of view if you think the long rate is too high issue short right but that's just the beginning of an answer but yes that's my answer thank you so please thanks a lot one issue that we learned from both say empirical and theoretical research oops doesn't bend one thing we learned from empirical and theoretical research is that the way and the strength that fiscal policy has an impact on the economy depends very much on how monetary policy behaves and there's quite a lot of research showing that you know if monetary policy interferes then the effectiveness of fiscal policy and multipliers are pretty low so don't you think that in this vein these rules should be somehow also binding for central banks if this is going to be effective and otherwise they can just work in opposite directions in many many cases or unless they have the same exactly the same loss function or something like this is a bad student I'm sorry but I missed some of it no can you clarify please okay my question is whether whether I mean there is a risk that you you will have these rules for the fiscal policy it is extra automatic stability stabilizer that you talked about but monetary policy does not play the same game then fiscal policy is just not effective enough so the question is don't you think that these rules these automatic stabilizers should be effective should be also binding for central banks in this case to work yeah it's all back they want to have a rule whether it's a tail or a rule or something I don't mind with that the automatic stabilizers will have to have some rule as well the outcome is the result of both if monetary policy does more of a job is less need for the other one and so on but I missed I missed the issue what can go wrong can go wrong if they have different goals for instance the goal of the fiscal policy is to stabilize unemployment as you suggested but this can be inflationary and then the central bank raises interest that depends on the divine coincidence right because if a divine coincidence holds to a first approximation everybody agrees that stabilizing inflation or stabilizing unemployment around you star is the thing to do now you star can move in which case both in the same way as your rule say take a tail rule there's an R star in front of it that moves instead difficult to know what it is you have to adjust it full time if you look at the rule I gave for unemployment benefits you have U star you don't know in real time what it is right so you have to adjust so in both cases you have to adjust but it seems to me that again there is no big conflict between the two rules one is not trying to go there maybe you are trying to do the same thing so I think we have to be concise if possible so Rolf thank you very much Olivier I'm trying to be very concise fiscal rules as they are currently discussed in the fiscal rules the fiscal rules as they are currently discussed in Europe you said they are an improvement at the same time fundamentally they are still addressed to individual countries the aggregate euro area the fiscal stance is still outside that framework per se and I was just wondering in your setting now how do you think about the different levels of aggregation and demand stabilization euro area level national level the heterogeneity that exist and then also targeting individual groups it's not clear to me if it's partly assumed away for the sake of clarity now or how does it play in thank you I have not thought about it you raise a good question I mean I thought of this as being at the national level so I didn't think of it in the context of euro zone I would tend to think that except for the externalities which were discussed in the paper this morning and so on this is something which is likely to be done the stabilization part at the national level whoever there is a stabilization fund at the EU level is an old issue which probably comes in in some form I should have stopped when I said I haven't thought about it so I have three more speakers and maybe we can collect the questions this time so I have Andrea, Jero and if you want still at all thank you Olivier I'll be very quick you're quasi automatic stabilizer based on the unemployment rate is it symmetric or asymmetric in the following sense so the FETS mandate talks about shortfalls in employment in the sense that there isn't such a thing as too much employment right so in your rule would it be a situation where the unemployment rate is too low and so benefits are lower and in the last year or two which we have been in that kind of situation how would have been what would have been the operation of this instrument if you have thought about it so I wanted to add just a slightly cautionary note even though I'm a fan of fiscal policy and so forth so we macroeconomists tend to think of fiscal policy mainly in terms of macro implications but fiscal policy particularly if you're going to use it in cases like responding to a supply shock has micro and efficiency implications as well and so there's a huge difference between the two examples that you gave subsidizing real wages or stopping the prices from going up in terms of efficiency in the electricity markets you said the second one is better because inflation doesn't go up but I mean we face the problem of getting through last winter and getting everyone to save and so these things matter a lot incentives matter a lot and as you know there's a German school of economists that I do not belong to but sometimes I can feel what they think that argues that for efficiency regions any kind of discretionary fiscal policy is evil and should not be done I mean I studied with you I didn't study with them but I you know one cannot forget these efficiency arguments move from the point that fiscal policy is yes so you move from the point that fiscal policies have political economy limitations and you suggest it's one of the possible avenues to address this stochastic DSA at the same time stochastic DSA has itself political economy limitations so far the explicit use of DSA for normative purposes has been done in the context of crisis resolution for instance IMF for EU programs now we are moving toward surveillance crisis prevention context where obviously member states will have a relatively stronger bargaining power and so there is therefore a material risk that some try to adjust the findings of stochastic DSA with safeguards with transitional provisions and transformations so my question is how can we mitigate the political economy limits of stochastic DSA I know you wrote something about it the need for a rational and transparent policy debate also we are able to measure the risk of reverse engineering but is that enough in a context where most policy makers don't have even a basic understanding of what DSA is quickly and what you want to do is long run sum of u minus u star equals you basically have unemployment benefits to work out so there is a level of unemployment and you want to pay more when unemployment is higher and less and you have to do it in such a way that it balances out and in the recent past I would have thought in the U.S. who would be in a fairly un-generous unemployment benefit regime again, conceptually it's easy practically the element filtering may be more difficult the point is that the shocks there are many distortions there are many shocks and so indeed stabilization is not by itself the only thing you want to do is exactly that and what you can do with fiscal policy is handle both, right, potentially so it seems to me that's making the argument in a way I don't agree but and then Ethan as DSAs can they be manipulated sure, you can make a growth assumption which is very optimistic there are various ways of preventing this if you basically may growth assumptions or interest rate assumptions very low rates which are too optimistic you're going to run out in trouble very quickly when the world actually happens so if there is an enforcement mechanism which says it's not working, you're not doing what you said you haven't respected what you promised to do I think the incentive to actually cheat at step zero is relatively limited the other is I think that the SDSA should be done by independent national fiscal councils in an essayist way I think they have to be done there rather than at the commission first because I think there has to be ownership and I have a sense yes everything can be manipulated but not to an extent and not in a way that later would not lead to being in trouble you know if a French use a growth rate which I'm sorry they did which is too high and then commit to a net expenditure plan based on that and growth is not they don't get a pass so yes nothing is perfect but it's less bad than the rest