BlackRock has laid out the case for a coordinated fiscal and monetary shock policy to defibrillate the global economy as it struggles to register a pulse.
In a new paper published last week, the BlackRock Investment Institute argues that with both monetary and fiscal losing potency, more radical approaches – such as the long-mooted ‘helicopter money’ drop – would be necesssary.
According to the BlackRock analysis, which counts former Federal Reserve vice chair Stanley Fischer as one of its authors, monetary policy is “almost tapped out”.
At the same time “fiscal policy is typically not nimble enough, and there are limits to what it can achieve on its own”, the report says.
The study says a “soft form of coordination” could ensure both fiscal and monetary policy work to stimulate the global economy but “simply hoping for such an outcome will probably not be enough”.
“An unprecedented response is needed when monetary policy is exhausted and fiscal policy alone is not enough,” the BlackRock paper says. “That response will likely involve ‘going direct’…”
Pumping money direct to individuals would bypass the current central bank blockage as policy coordination measures ensure “fiscal expansion does not lead to an offsetting increase in interest rates”.
However, the report says policymakers must set explicit controls on how to ‘go direct’ and have a well-defined exit strategy.
BlackRock says the ground rules for using such extreme financial intervention measures include:
- defining the unusual circumstances that would call for such unusual coordination;
- in those circumstances, an explicit inflation objective that fiscal and monetary authorities are jointly held accountable for achieving;
- a mechanism that enables nimble deployment of productive fiscal policy, and;
- a clear exit strategy. Such a mechanism could take the form of a standing emergency fiscal facility. It would be a permanent set-up but would be only activated when monetary policy is tapped out and inflation is expected to systematically undershoot its target over the policy horizon.
The study says any market impact of a direct money injection would depend on “whether it was implemented well in advance of the next downturn”.
“If it were [introduced ahead of a crash], it would increase the chances of the framework being well understood by the markets, underpinning its credibility and efficacy,” the paper says.
Inflation-linked bonds and real assets would benefit if the joint fiscal/monetary jab comes ahead of a serious economic slowdown, according to BlackRock.
But if the emergency treatment is only applied post-crisis, the report says nominal bonds would outperform.
“An effective implementation of this coordinated framework has market implications beyond fixed income,” the paper says.
“… If this policy framework were effective at reducing the probability of a liquidity trap, nominal bond yields would tend to climb but underlying economic volatility may also decline – both of which would argue for a narrower ERP [equity risk premium].”
As well as Fischer, the BlackRock paper features a string of other authors including: Jean Boivin, BlackRock Investment Institute chief, and head of macro research, Elga Bartsch; and, BlackRock vice chair, Philipp Hildebrand.