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Revisiting the Standard Macroeconomic Policy Framework: Should Monetary and Fiscal Policy Be More Closely Coordinated?
February 28, 4:00-5:30 M-RCBG Conference Room, Belfer 503

The standard macroeconomic policy framework rests on a strict separation of monetary and fiscal policy, and assigns the primary role for managing aggregate demand (“stabilization policy”) to an independent, technocratic central bank. This “flexible inflation targeting” framework developed in response to the challenges of high inflation in the 1960s and 1970s, and was informed by economic debates and developments in economic theory. 

The experience of the Global Financial Crisis and Great Recession that it triggered, coming on top of that of Japan’s secular deflation since the mid-1990s, have raised questions about the effectiveness of this framework when the threat to full employment and price stability is “from below” (too little aggregate demand and employment and too little inflation) rather than “from above” (too much demand and too high inflation). 

In this study group, we will revisit the thinking behind the standard macroeconomic policy framework and explore whether the framework needs to be modified in light of the Great Recession and Japan’s experience and, if so, how. What is the difference between “fiscal policy” and “monetary policy,” and why is one the preserve of “politicians” and the other that of “technocrats”? Has the imperative to keep the government’s hands off the printing press over-constrained the use of fiscal policy? Is the reliance on monetary policy feeding excessive “financialization” of the economy? Can the euro area survive without the monetary union becoming a fiscal (and political) union too? Will policymakers have enough “policy ammunition” in the next economic downturn and what sort of unconventional policy responses might be in store? What does an optimal macroeconomic policy framework look like in a world of “secular stagnation”? We will touch on these and related questions.

Suggested reading: Paul Sheard, 2018: “Rethinking Macroeconomic Policy Frameworks,” in Reinventing Bretton Woods Committee and Astana International Financial Center, The 10 Years After: The End of the Familiar…Reflections on the Great Financial Economic Crisis, pp.177-185.

Paul Sheard is a veteran central bank watcher and markets economist, who has written and spoken widely on QE and unconventional monetary policies. He most recently was Vice Chairman of S&P Global, after serving as Executive Vice President and Chief Economist and earlier Executive Managing Director and Chief Economist of Standard & Poor’s Ratings Services. Previously, he held chief economist positions at Nomura Securities and at Lehman Brothers and was Head of Japan Equity Investments at Baring Asset Management. Earlier, Sheard was Lecturer in Economics at the Australian National University (ANU) and Osaka Gas International Cooperation Associate Professor of Economics at Osaka University, and was Visiting Scholar and Visiting Assistant Professor of Economics at Stanford University and Foreign Visiting Scholar at the Bank of Japan. Sheard is a member of the World Economic Forum’s Global Future Council on the New Economic Agenda (2018-2019) and was a member of the WEF’s Global Agenda Council on the International Monetary System (2010-2012). He served on committees of the Japanese Government’s Economic Deliberation Council, as an appointee of Prime Minister Ryutaro Hashimoto (1997-98) and as an appointee of Prime Minister Keizo Obuchi (1998-1999), and was a member of the oversight board of the Japanese Government’s Research Institute of Economy, Trade and Industry (2001-2006).  From 2003 to 2010, he was a non-executive director of ORIX Corporation. In 2006, Sheard was recognized by Advance as one of a 100 Leading Global Australians. Sheard is on the board of the Foreign Policy Association and is a member of the Bretton Woods Committee, the Council on Foreign Relations, and the Economic Club of New York. He speaks regularly at conferences around the world, and his views on the global economy and policy issues are frequently cited in the international press. Author or editor of four books and numerous academic articles, Sheard’s 1997 book in Japanese, Mein Banku Shihon Shugi no Kiki: Biggu Ban de Kawaru Nihongata Keiei (The Crisis of Main Bank Capitalism: How Japanese-style Management Will Change with “Big Bang”), won the Suntory-Gakugei Prize in the Economics–Politics Division. Sheard received a BA (Hons) from Monash University and a Master of Economics and PhD in Japanese Economy from the ANU. Email: paul_sheard@hks.harvard.edu