Designing stabilisation policies in response to debt crises

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Giancarlo Corsetti’s research, in collaboration with officers at policy institutions, pioneered a new generation of models for the assessment and design of stabilisation policies in response to large downturns and sovereign debt crises in the United Kingdom and the European Union.

Contrary to the polarised views prevailing at the outset of the European debt crisis in 2010, his research showed that the destabilising effects of the crisis in the Eurozone stemmed from interactions between fundamental economic weaknesses and self-fulfilling expectations.

The models established that, first, fiscal austerity alone cannot restore ‘confidence’ and financial stability; second, in the absence of effective reciprocal support between fiscal and monetary authorities, fiscal expansions may be counterproductive; third, stabilising this type of tail risk requires unconventional monetary policy interventions.

As a result of his collaborative research with staff at the European Central Bank (ECB), the ECB has defined and developed new unconventional monetary policy measures.

Corsetti’s research in collaboration with European Stability Mechanism staff on debt sustainability analysis impacted the design of Eurozone financial assistance programmes and its response to the COVID-19 crisis.

In addition, Corsetti’s research on monetary policy in small open economies, conducted with Bank of England staff, impacted the Bank’s view on the optimal policy mix.

“Corsetti’s work… has helped move our thinking about how shocks propagate internationally beyond the traditional trade linkages, to consider the roles of the exchange rate, financial variables and the substitutability of home and foreign goods.”

– International Director, Bank of England