Chart of the Week: Introducing Fathom’s Macroeconomic Policy Indicator – the FMPI

Fathom’s Macroeconomic Policy Indicator (FMPI) weights together both fiscal and monetary policy to give an overall measure of the degree of macroeconomic stimulus in any given country. Globally, policy is very loose, but growth is not responding – perhaps due to the policy mix. We pose the question, is this the end of the road for monetary policy?

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A positive score in the chart above implies that policy is tight, and a negative score that it is loose. The FMPI is calibrated so that a reading of minus one implies that the stance of macroeconomic policy is sufficiently loose to boost growth in demand by one percentage point relative to growth in supply. Across the OECD as a whole, policy has loosened significantly since the financial crisis hit. It should now be adding around 0.3 percentage points to growth this year. But the experience of individual developed economies is not uniform, particularly within the euro area.

As our chart shows, policy is substantially tighter in Greece and in Portugal than it is in Germany. This is due in part to enforced austerity, but a period of outright deflation in each of these peripheral economies is also to blame. In effect, this is the Walters critique writ large. When members of a monetary union suffer asymmetric shocks, the requirement to maintain a single interest rate means that weaker economies will face a lower inflation rate, and therefore tighter monetary policy, than stronger economies.

According to the FMPI, macroeconomic policy is loose across the developed world. And yet growth is weak. In our view this has a lot to do with the policy mix. Following the global financial crisis, many major economies have undertaken a combination of tighter fiscal, and looser monetary policy. For some time, and with good reason, we have been detecting a growing sense of frustration with the ‘lower for longer’ approach to monetary policy.

As we set out in our Global Economic and Markets Outlook for 2016 Q2, there is now a real danger that monetary policy has been too loose for too long, and this is now starting to affect potential supply, even in the US. Over the next few years, we expect to see a steady change in the policy mix, as looser monetary policy is replaced with looser fiscal policy. The US and China are likely to lead the way. The FMPI is available both via Thomson Reuters DataStream and on Fathom’s Chartbook.