The next recession will call for unprecedented coordination of fiscal and monetary policy in the U.S. and other advanced economies, according to a new report from the BlackRock Investment Institute.
“Monetary policy is almost exhausted as global interest rates plunge towards zero or below,” the report says, noting that about a third of all government and investment-grade bonds are trading at negative yields amid a powerful downward trend for interest rates.
As a result, it’s likely that fiscal policy will play a bigger role in the next downturn. “Fiscal policy can stimulate activity without relying on interest rates going lower – and globally there is a strong case for spending on infrastructure, education and renewable energy with the objective of elevating potential growth. The current low-rate environment also creates greater fiscal space,” the report says.
One problem, however, is that fiscal policy is often a political issue and can be slow to respond to crises. And adding to current high levels of debt may push interest rates higher, or create fears of future tightening, reducing or even eliminating the stimulative effect.
Given these constraints, policymakers may have to come up with a new approach. “An unprecedented response is needed when monetary policy is exhausted and fiscal policy alone is not enough. That response will likely involve ‘going direct’: Going direct means the central bank finding ways to get central bank money directly in the hands of public and private sector spenders.”
Another term for this approach is “helicopter money” – a phrase associated with former Federal Reserve Chair Ben Bernanke that describes the government giving cash to people directly in order to boost the economy.
Such an approach would involve its own set of problems, the report says, including the challenge of regaining control over fiscal spending and constraining any inflation that is generated.
Read the full report here.