In this talk, Prof David Vines will provide an overview of his recent paper ‘Monetary and fiscal policy in the Great Moderation and the Great Recession’. In this paper he argues for a new approach to monetary and fiscal policy.

During the Great Moderation, the inflation targeting regime worked well. Central banks used the interest rate to stabilize inflation, and—subject to inflation being controlled—stabilized the level of demand. Fiscal policy exerted discipline over public-sector deficits, thereby—indirectly—managing the level of public debt. The author found that the ‘fiscal housekeeping’ worked well, because the monetary authorities were stabilizing the economy. But once private-sector deleveraging led to the Great Recession, and interest rates hit their zero bound, the economy could no longer be managed by monetary policy. Recovery came to depend on the ‘automatic stabilizers’: as output and tax revenues fell, public debt was created, supplying the assets which a deleveraging private sector wished to hold. Prof Vines believes that the recovery has been very gradual. It would have been much faster if fiscal policy had been responsible for the restoration of full employment, in an environment which tolerated the necessary rises in public debt. The author argues that policies of austerity, designed to reduce public debt, have slowed the recovery. Sustained growth will not return until the private sector begins to invest strongly again, creating the financial assets which the private sector wishes to hold, thereby enabling public debt to be retired. This has not yet happened, according to Prof Vines, because the private sector, correctly, does not believe that macroeconomic policy is capable of sustaining a strong recovery.

David Vines is a Professor of Economics, and a Fellow of Balliol College, at Oxford University, where he is also Acting Director of the Political Economy of Financial Markets Programme at St Anthony’s College and Director of the Ethics and Economics Programme at the Institute for New Economic Thinking in the Oxford Martin School. In addition he is a Research Fellow of the Centre for Economic Policy Research in London and CAMA Director in the Globalisation and Trade program.

David’s research is on macroeconomics, finance, and global economic governance; he has published many papers and books on these subjects. His initial work was with the Nobel-Prize winner James Meade in Cambridge; together they published some of the earliest research on inflation-targeting regimes. He is currently working on the restoration of trust in the financial system, on the future of the European Monetary Union, and on the role of the International Monetary Fund in ensuring international macroeconomic cooperation. He teaches macroeconomics, international economics and development economics to both graduate students and undergraduates at Oxford University.

Last year David published Capital Failure: Restoring Trust in Financial Services (OUP, 2014), which he edited with Nick Morris. Peter Temin and he have recently written The Leaderless Economy (Princeton University Press, 2013) and Keynes: Useful Economics for the World Economy (MIT Press, 2014).