Scribd Logo
Upload

Welcome to Scribd!

  • 36 views

    JPF in Search of A Goldilocks Exit Strategy Euro Intelligence 160709

    Uploaded by

    Bruegel
    The document discusses the challenges that policymakers face in developing "Goldilocks exit strategies" from the extraordinary economic policies enacted in response to the financial crisis. It argues that exiting support too early could cause a double-dip recession, while exiting too late could allow debt and central bank fiscal roles to grow excessively. An ideal exit would be gradual and contingent on economic conditions, but it is difficult to time perfectly. The document also notes problems around coordinated withdrawal across countries and different policy tools.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd

    JPF in Search of A Goldilocks Exit Strategy Euro Intelligence 160709

    Uploaded by

    Bruegel
    36 views3 pages
    The document discusses the challenges that policymakers face in developing "Goldilocks exit strategies" from the extraordinary economic policies enacted in response to the financial crisis. It argues that exiting support too early could cause a double-dip recession, while exiting too late could allow debt and central bank fiscal roles to grow excessively. An ideal exit would be gradual and contingent on economic conditions, but it is difficult to time perfectly. The document also notes problems around coordinated withdrawal across countries and different policy tools.

    Original Title

    JPF in Search of a Goldilocks Exit Strategy Euro Intelligence 160709

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses the challenges that policymakers face in developing "Goldilocks exit strategies" from the extraordinary economic policies enacted in response to the financial crisis. It argues that exiting support too early could cause a double-dip recession, while exiting too late could allow debt and central bank fiscal roles to grow excessively. An ideal exit would be gradual and contingent on economic conditions, but it is difficult to time perfectly. The document also notes problems around coordinated withdrawal across countries and different policy tools.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    36 views3 pages

    JPF in Search of A Goldilocks Exit Strategy Euro Intelligence 160709

    Uploaded by

    Bruegel
    The document discusses the challenges that policymakers face in developing "Goldilocks exit strategies" from the extraordinary economic policies enacted in response to the financial crisis. It argues that exiting support too early could cause a double-dip recession, while exiting too late could allow debt and central bank fiscal roles to grow excessively. An ideal exit would be gradual and contingent on economic conditions, but it is difficult to time perfectly. The document also notes problems around coordinated withdrawal across countries and different policy tools.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    In search of a Goldilocks exit strategy http://www.eurointelligence.com/index.php?

    id=581&type=98&tx_ttnews[tt_news]=2511

    Title: article
    Subtitle:
    Author:

    16.07.2009

    In search of a Goldilocks exit strategy


    By: Jean Pisani Ferry

    When policymakers meet nowadays, at the G8 summit in L’Aquila or elsewhere, the discussions
    naturally revolve around exit strategies, in other words: when and how will economic policy return
    to normality?

    It is only natural that policymakers wonder. Whether or not they are deemed appropriate and
    sufficient, actions taken by governments and central banks to support banks and stimulate the
    economy are genuinely extraordinary. Budget deficits in several countries have entered unknown
    territory (at least in peace time) and central bank balance sheets bear no resemblance to what they
    were two years ago. Impatience is thus perfectly understandable. But this does not make the task
    easy.

    The first question to be asked is when retrenchment should start. The answer is neither too early,
    as a hasty withdrawal of support could precipitate a double-dip recession (as in Japan 1997), nor

    1 of 3 17/07/2009 18:34
    In search of a Goldilocks exit strategy http://www.eurointelligence.com/index.php?id=581&type=98&tx_ttnews[tt_news]=2511

    too late as debt build-up and the taking on by central banks of a de facto fiscal role should be
    ended as soon as feasible without severe damages to growth. But the best analysis cannot
    guarantee a Goldilocks exit and against the background of a still very weak economy it is
    advisable to err on the side maintaining support for a little too long.

    But an exit should be prepared. In fact the announcement of a credible exit strategy would help
    calm down bond markets and keep inflation expectations low. There is no contradiction between
    providing as much budgetary and monetary support as needed today and committing for tomorrow
    to strict targets, rather the two are complementary. The US arguably lacks medium-term
    commitments and this threatens the effectiveness of current actions. Europe’s policies are better
    anchored in the medium term in spite of the shortcomings of the Stability Pact. So a good
    approach for European policymakers at a time when the public wonders about the next step would
    be to preannounce their exit strategy, while making the start of actual normalisation contingent on
    a sustained improvement of economic conditions.

    This however leaves two problems unresolved. The first is that as soon as conditions improve,
    most governments are likely to embark on consolidation simultaneously. This has often been done
    successfully in the aftermath of financial crises, but the difference here is that all countries are in
    recession. Against the background of wealth losses and unfinished deleveraging, private demand
    may be too weak to offset a major simultaneous cut to public demand. So there is a collective
    action problem that needs to be recognised and addressed. It will possibly be more difficult than
    the problem Europe faced at end-2008 when designing its (loosely coordinated) stimulus.

    The second problem does not arise from coordination among countries but across policy
    instruments. Current exceptional measures are of three different types: support to the banking
    sector and individual banks through both government guarantees and central bank provision of
    liquidity against collateral (there are also public recapitalisations but the time horizon for state
    withdrawal may be longer here than on other fronts); overall monetary stimulus, involving in
    varying degrees non-standard easing techniques; and budgetary stimulus. Separations between the
    three categories are not watertight. Support to banks is in some respect hard to distinguish from
    overall monetary stimulus and central banks have embarked on quasi-fiscal initiatives. But it is
    conceptually useful to distinguish them.

    2 of 3 17/07/2009 18:34
    In search of a Goldilocks exit strategy http://www.eurointelligence.com/index.php?id=581&type=98&tx_ttnews[tt_news]=2511

    The question now is: who should normalise first? An obvious candidate for early exit is fiscal
    policy since budgetary stimulus involves costs. So even though the lags involved in monetary
    policy are arguably longer, there are compelling reasons to remove budgetary support first. But the
    same applies to the withdrawal of bank support: it is only after banks have been adequately
    recapitalised and restructured that implicit subsidisation through the provision of cheap liquidity
    against collateral of uncertain quality can be ended. So the natural sequencing is to start with the
    cleaning up of the banking sector (keeping macro support broadly in place while this is being
    done), then to withdraw budgetary support, and to end with monetary policy normalisation.

    This Goldilocks sequencing however raises difficulties. First, for the cleaning up of the banking
    sector to start, accurate information on the individual banks’ true health needs to be available,
    which in turns implies to stop agonising over stress tests. Second, the interrelated character of
    current policy actions implies that exit requires an unusual degree of coordination between
    governments and central banks. This only needs to be temporary until monetary and fiscal policy
    can again be separated, but in the meantime the situation requires sharing information, thoughts
    and plans – not an easy task within a single country and an even more daunting one within the
    euro area. Third, the very fact that monetary policy should normalise last creates a potential
    tension with other policy planks. Central banks are unlikely to accept their own normalisation
    being hostage to potential government procrastination.

    These problems are far from insurmountable, but they need to be recognised, addressed and
    solved. This is why it is not too early to think about exit strategies, even though it is still too early
    to act.

    Jean Pisani Ferry is Director of the Bruegel think tank in Brussels and Professor at the
    Université Paris-Dauphine.

    <- Back to: article

    Go back to the regular design...

    3 of 3 17/07/2009 18:34

    You might also like