Myself and many others have suggested that in order to help out monetary policy when interest rates reach their effective lower bound [around 0], there should be a discretionary fiscal stimulus.
My version of this is that the BoE would quantify how much was missing given what was possible not just with rates, but also QE. And the Treasury would decide whether to accept this advice, and, if so, how to implement it.
Imagine if this system was already in place for the 2017 General Election.
The question for all parties would then be: do you agree with the BoE’s current estimate of the missing stimulus? If not, what do you think it is, and why does your analysis differ? If you do agree, how are you going to implement and unwind it? What other – for example distributional – objectives are guiding those choices? If there has been missing stimulus applied in the past, has it worked and had the intended effect? If not, what is to be done differently next time? If the BoE, in the face of one of the many downside risks that might materialise, were to sharply increase its missing stimulus quantification, what would your contingency be? How are the answers to all these to be made consistent with long term fiscal sustainability?
This would be a much better world, in my opinion, than the clash of brands and scare stories that colours the current discussion of fiscal policy on the airwaves, which – Labour’s draft manifesto aside – never mentions the constraints on monetary policy.