Jumpstarting Europe. New Macroeconomic Policies after the Great Crises.

Partners: (LUISS, P. Benigno; Palermo, D. Furceri; Roma La Sapienza, G. Di Bartolomeo; Torino, F. Passarelli)

Abstract

JUMPS main objective is to study the effectiveness of the current monetary and fiscal policy mix to jump start Europe after the pandemic shock.
During the last two decades, the world economy has experienced two major shocks of unprecedented magnitude, the 2007-08 financial crisis and the COVID pandemic episode. Whereas the financial crisis was rooted into endogenous distortions hidden in the financial sector, the COVID shock had a completely exogenous nature.
Shocks of such a magnitude require significant policy interventions to avoid that they end up into economic depressions. The EU has reacted in an unprecedented way to the COVID shock through a combination of expansionary monetary and fiscal policies. This policy mix is new and different from that used in the aftermath of the financial crisis which was mainly relying on monetary policy.
The ECB activated the Pandemic Emergency Purchasing Program (PEPP), the Eurogroup suspended the Stability Pact and launched a new program, Next Generation EU (NGEU), to sustain investment and the recovery.
JUMPS objective is to study the effectiveness of the current monetary and fiscal policy mix, its potential trade-offs and risks, focusing on distributional issues and political economy considerations that can affect its implementation.
The proposal can be divided into six themes that will be pursued in an organic and coordinated way:
1) Monetary policy stimulus: study the effectiveness of PEPP compared with alternative strategies, like helicopter money and enhanced forward guidance; analyze sovereign-debt risk due to the unwinding of PEPP.
2) Fiscal policy stimulus: provide a quantitative assessment of structural investments both from a micro and a macro perspective, by developing a new generation of models that integrate the macro dynamic approach with the fiscal microsimulation.
3) Reallocation effects of public investment across sectors: investigate reallocation effects and cross-sectional spillovers of new technologies adoption, skill-biased technological change and capital-skill complementarities.
4) Regional effects of public investment: explain the heterogeneity in the policy multipliers, measure capital misallocation across European regions and investigate how public investments can affect it.
5) Political feasibility: study the European population after-COVID sentiment about public interventions, redistribution entitlements, intergenerational policies. In order to identify a social welfare function necessary to benchmark efficiency-enhancing policy proposals that are also politically viable.
6) Policy recommendation: identify a set of policy recommendations that should drive the post-COVID recovery. JUMPS results will be condensed in a set of policy proposals that will bolster the societal impact of the project.