Monday , September 21 2020
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To each crisis its analogy, to each analogy its critical reflection

Summary:
Interesting speech by Dr Robert Holzmann, Governor of the Central Bank of the Republic of Austria. Throughout history, crises have been archetypal examples of moments when the power of analogy overrides, at least temporarily, the inductive and deductive components of economic policy decisions.1 The COVID-19 crisis, which has been severely affecting the global economy since spring 2020, is no exception to this rule. The devastating human consequences of the Spanish flu of 1918 led us to conclude that there need not be a trade-off between keeping mortality rates low and economic activity up.2 The Great Dep ression of the 1930s taught us what a difference quick and discretionary fiscal stimulus can make in the recovery phase.3 Finally, the Great Recession following the financial market

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Interesting speech by Dr Robert Holzmann, Governor of the Central Bank of the Republic of Austria.

Throughout history, crises have been archetypal examples of moments when the power of analogy overrides, at least temporarily, the inductive and deductive components of economic policy decisions.1 The COVID-19 crisis, which has been severely affecting the global economy since spring 2020, is no exception to this rule. The devastating human consequences of the Spanish flu of 1918 led us to conclude that there need not be a trade-off between keeping mortality rates low and economic activity up.2 The Great Dep ression of the 1930s taught us what a difference quick and discretionary fiscal stimulus can make in the recovery phase.3 Finally, the Great Recession following the financial market turmoil of 2008 showed that a monetary union like the euro area needs strong monetary policy signals to ensure financial stability in the short term and prevent financial market fragmentation and an impairment of monetary policy transmission in the medium term.

These are just a few examples of how, in the first few months of the current crisis, we let historical analogies inform our policy responses – consciously or unconsciously. And let me be clear here: This is a good thing. In times of crisis, pressure to act swiftly is high while there is little time for deliberations and discussions. In such situations, analogies from history give us orientation we would otherwise lack.

In economic policy, the time of drawing analogies must be followed by a time of reflection after the crisis – not least to create a new basis for future action. Measures taken during a crisis, which may be far-reaching in their consequences and may seriously distort market mechanisms, must be subjected to thorough and comprehensive impact assessments (i.e. scientific evaluations) as soon as the economy is back on track. This is the only way to prevent economists and policymakers from cherry-picking historical analogies and s uccumbing to the habit of always “fighting the last war.” Let me therefore look ahead and briefly discuss the three challenges that will, in my opinion, shape monetary policy in the euro area in the coming years. 

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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