As the Times reported 20 years ago, “the pound’s firmer tone, and softer German money market rates, could tempt the Chancellor to shave half a point off base rates to coincide with the Prime Minister’s speech at Brighton today”. The party conference season is no longer a time for speculation about changes in interest rates. No doubt we shall learn a great deal about the appropriate allocation of responsibilities to monetary policy, on  32  10  Bernanke (2011). BIS central bankers’ speeches  the one hand, and macro-prudential policy, on the other, over the next twenty years. But we should not throw out the baby with the bathwater. Low and stable inflation is a pre-requisite for economic success. Much of what I have said is, I hope, a call to arms for economists, and especially younger economists, to rethink the foundations of our macroeconomic theories. Not to abandon rigorous modelling – after all, in the words of last year’s Nobel Prize winner Tom Sargent “it takes a model to beat a model” – but to recognise that in our present models the way we think of human behaviour in the face of irreducible uncertainty is seriously incomplete. Ideas matter far more than is usually recognised in the public discussion of monetary policy which concentrates too much on personalities. Keynes and Stamp both knew that.
The additional net asset purchases in particular will help to counter the self-reinforcing dynamics on the bond markets. We are helped by the operational flexibility of the asset purchase programme, which we are already using to its full extent. So did the ECB communicate poorly? The key message of the programme should be clear. The ECB stands ready to do everything within its mandate to counter market disruptions that impair the transmission of its monetary policy, because monetary policy cannot otherwise be effective. This is the unanimous decision of the Governing Council. Is it perhaps the case that central banks are simply powerless in this crisis? No, but monetary policy cannot resolve this crisis on its own. We also need a strong fiscal response, ideally at European level. Most economists agree that fiscal policy is currently the most important instrument with which to counter the crisis. Why? The ECB can provide banks with liquidity, but that doesn’t necessarily mean that the banks will actually lend to companies that are struggling because of the virus. That’s where the government comes in. It can support the economy by issuing credit guarantees, for example. The package of measures adopted by the German government on Friday contained guarantees of that kind. Other Member States have agreed on similar measures. The fiscal response at the international level hardly looks coordinated. Is that a problem? Absolutely. We need a strong, joint fiscal policy response in Europe. This crisis is not limited to individual Member States.