Declining effectiveness of monetary policy and increased fiscal policy space make the case for increased public debt issuance in combination with quantitative easing to boost growth. There is concern that such policy coordination would lead to fiscal dominance whereby monetary policy is dictated by considerations in terms of public finances to maintain public debt sustainability. Once the pandemic will be behind us, governments will have the responsibility to improve their public finances. Inaction in this respect would put the burden on the ECB when fighting future downturns. It would be a different type of fiscal dominance.
Based on our indicators, uncertainty has declined after the huge jump earlier in the year following the outbreak and spreading of Covid-19. Starting top left and moving clockwise, the media coverage based indicator has declined but remains at a high level, reflecting that the pandemic continues to dominate headlines. Uncertainty based on company surveys has eased in the US whereas in Germany, the improvement is more outspoken. In both cases however, the level remains very high. The geopolitical risk measure has increased recently. The series is quite volatile but one observes a rising trend [...]
Compared with three months earlier, the blue area of the chart – representing data for the last three months – is spreading out like an oil stain. Nevertheless, most indicators remain well below their long-term average, i.e. the inner grey circle in the chart. In particular, indicators for households and services improved substantially, due to the lifting of the lockdown restrictions. Retail sales boomed in the period May-July following the reopening of shops and the temporary reduction of the VAT rate in July [...]
