Monetary-fiscal coordination

People may differ on the effectiveness and desirability of unconventional monetary policy. But most of those in the sensible camp would agree that if we were about to head into recession, the most important aspect of the policy response is not what the Bank of England will do but how the Treasury will respond. To that end now is one of those times when it would have been much better to have had monetary and fiscal policy coordination hard-wired into the framework. My preferred system for doing this would be one in which the Bank of England's monetary policy committee decides, after considering the limits to both conventional and unconventional monetary policies, how much stimulus it thinks it is missing. It then communicates this in some commonly understood units (perhaps equivalent changes in VAT) and then it is over to the Treasury to consider both whether it agrees with the missing stimulus analysis and, if so, how it intends to respond. The office for budget responsibility then has a role in checking whether the Treasury's response is consistent with the long-term fiscal framework. The closest approximation to this  that we have seen was the counter to the Osborne fiscal Charter, owned by John McDonnell, and presumably written by Simon Wren Lewis. The situation we find ourselves in now is one in which the Chancellor talks of 'resetting' fiscal policy, which no one really understands, and where central bank governor claims to have all the tools necessary to hit the inflation target, which we know cannot always be true but which is an understandable attempt at instilling confidence.