-“The European Policy Framework: A lack of Coordination Between Monetary Policy and Fiscal Policy”, with G. Tria, in L. Paganetto (ed.), Sustainable Growth in the Eu, Springer International Publishing AG 2017.

To deal with the Euro crisis the coordination of macroeconomic policies is essential. In our view, this implies a policy mix of expansionary monetary policy and accommodative fiscal policy. Under the current extraordinary circumstances (low interest rates and low or even negative inflation rates), without a fiscal stimulus EQE produces effects that take time to materialize. That is, the quantitative easing must be long lasting in order to end deflation, bringing again the inflation rate on its desired (equilibrium) path. This sharpens the risks of financial instability. At the same time, EQE loosens the budget constraint, substituting national debts, a government liability, with money, a not-redeeming asset. This leaves some room for a transitory deviation from the planned pace of fiscal consolidation (i.e., a temporary worsening of nominal government deficit), because it is expected to not affect government structural balances, therefore preserving long run sustainability. We suggest that the fiscal stimulus can and must be designed so as to target both aggregate demand and potential output. Total investment is the key-variable in this approach. Empirical evidence shows that the declining trend in the rate of capital accumulation in Europe has been worsened by the 2008 financial crisis (incidentally, the evidence on savings is barely compatible with the secular stagnation hypothesis). In some countries like Italy, the net capital stock itself has ceased to grow. Both private and government investment should be furthered, to the extent that the public capital stock is a driver of growth, directly entering in the firms’ production function or shifting total factor productivity. Revenue neutral tax shifting changes may help in making even more sustainable this strategy. Revenue neutral fiscal incentives, enacted by the individual Eurozone countries, in a hopefully synchronized effort, might increase aggregate demand, enhancing at the same time potential output and without raising the government deficit. There are many ways to change (and re-balance) the tax composition, reducing the tax pressure on productive inputs and raising consumption taxes. We think that either the fiscal burden on the new investments or on the personal incomes should and could be targeted in this re-modeling of tax rules.