Recession ready?

These challenges demand a broad and proactive policy response – both monetary policy and fiscal policy should be overhauled to ensure that they are ready for the next recession. And while a full prescription for the future conduct of monetary and fiscal policy is left to future work, this report sets out the steps that should be taken to strengthen the framework.

On the monetary policy, these include: strengthening the role of QE, including normalising its use within the wider framework; undertake a review of the instruments and strategies for monetary policy; and, as part of that review, consider the powerful in principle case for raising the 2 per cent inflation target; finally, acknowledge publically that monetary policy alone will not be able to support the economy in the next recession. Doing so would facilitate preparations for the next recession and catalyse a wider debate.

On fiscal policy, we recommend the following steps: most importantly, the fiscal policy rules need to be rewritten to include an explicit objective for economic stabilisation and commensurate and credible deficit reduction thereafter; the automatic stabilisers should be strengthened, as a minimum unwinding the weakening in recent years; there should be explicit preparations for providing effective discretionary fiscal stimulus.