Professor Philip Lane:

As the Deputy has said, the historical pattern is to have a significant move in monetary policy when recession hits. I emphasise that 2008 was extremely atypical because it was so severe. There was a clear set of imbalances in the run up to it that made the recession especially deep and nasty. The recessions we speak about now that might happen in the coming years are not of that nature. The more typical recession in the US, for example, is a contraction of less than 1% of GDP compared to the -5% seen in 2008 and 2009. We have to be measured about mild recessions. We do not have the imbalances of that period. On the other hand, it will be a mix of a number of factors. Central banks have already done quite a bit in terms of finding unconventional ways to have accommodating monetary conditions. At every monetary policy meeting of the ECB when we release a statement the final part of that statement indicates the responsibility on fiscal policy. In 2008 and 2009 there was a global co-ordinated fiscal response. In a severe recession situation there must be a fiscal response. This is one reason we and others elsewhere put so much emphasis in non-recessionary times on running fiscal policy prudently. It gives us the room to be aggressive in a downturn. We do not advocate surpluses for the sake of it. We advocate them in the good years to allow significant deficits in the bad years.

The Scandinavian countries are interesting in this regard. They want to protect public services and public spending so, therefore, they run a very prudent fiscal policy. In the mid-2000s countries such as Finland and Sweden had surpluses of the order of four or five percentage points of GDP. This meant they could have a big fiscal response in the crisis and avoid the austerity that was so damaging. These are the connectives. If we want to turn on fiscal stimulus measures in a recession we have to build them up in the good years.