Speech

Fourteenth Jacques Polak Annual Research Conference on “Crises: Yesterday and Today, by David Lipton, First Deputy Managing Director, IMF”

November 7, 2013

As prepared for delivery

Good morning, ladies and gentlemen. I am delighted to welcome you to the IMF’s Fourteenth Jacques Polak Annual Research Conference. This conference has become a major international forum for researchers and policymakers to exchange ideas about the latest developments in the world economy. Our Research Department always puts together a program that offers a rich offering for rigorous debate. Let me take this opportunity to thank all the organizers, and especially the participants, of the conference.

The focus of this year’s conference is the economics of crises. This is one of the defining issues of our times as we live in a world that still displays, in various ways and across many countries, the scars of the global financial crisis. In a number of advanced economies, the costs of the crisis continue to be staggering as they struggle with high and persistent unemployment. The crisis has also thrown up a number of complex policy questions. How to restore aggregate demand and deal with overhangs of indebtedness in a currency zone? How to unwind unconventional monetary policies? How emerging market countries should manage heightened vulnerabilities in the face of slower growth and volatile capital flows? I am sure participants will add to this list of questions.

This year’s conference is a truly special event as we take the opportunity to honor Stanley Fischer’s lifelong contributions to economic research and policy. The theme of the conference is a fitting one to celebrate a man whose work on crises has provided an intellectual launching pad for several strands of research that will be presented here. Stan’s contributions to our understanding of crises began in academia at MIT, and that was only the beginning. After whetting his policy appetite in the 1980s with his work that helped arrest the Israeli hyper-inflation, he went on to serve as Chief Economist of the World Bank, and then in my current job, as First Deputy Managing Director of the Fund. During his tenure here, he dealt with a wave of emerging market crises spanning from Mexico to East Asia, from Russia to Brazil, Argentina and Turkey. Most recently, as Governor of the Bank of Israel, Stan both implemented his own recommendations and innovated with great skill to successfully steer his own economy through the turbulent storms of recent years. At every stage, his views and actions have provided food for thought for a new generation of researchers and policymakers.

Besides being an exceptional policymaker, Stan is also a dear friend to many of us. It is gratifying to see that the conference program brings together an exceptional group of economists and policymakers, many of whom studied, or worked in collaboration with him. And, following Stan’s rigorous standards as a researcher, the papers in the program approach the puzzling issues of today using a combination of thoughtful case studies of past crises, innovative empirical methods, and new theoretical analysis. I see the conference program provides new insights on the economics of crises for three broad areas of policy that are closely related to the research program we pursue in the Fund.

The first area is the enduring topic of the impact of exchange rate regimes on macroeconomic outcomes. In his thought-provoking Mundell-Fleming Lecture, Paul Krugman shows that the exchange rate regime has played a crucial role in the recent travails of the euro area economies. His analysis has implications for the likelihood of such crises in other countries. Some other papers in the program discuss the lessons for Europe from currency pegs in Latin America, the macroeconomic implications of currency depreciations in the aftermath of crises, and the performance of countries with different types of exchange rate regimes.

The IMF has been actively engaged in the policy debate on exchange rate regimes. On a subject Stan has studied, the Fund has encouraged a longer-term shift toward greater exchange rate flexibility as a means to reduce the incidence and severity of crises. This is not to say that a freely floating regime is the only available option for economies buffeted by the ebbs and flows of global finance. In a series of recent studies, the Fund has outlined the possible role that capital flow management measures can usefully play in mitigating the financial stability concerns raised by large inflows under certain circumstances. At the same time pointing out that they should not substitute for the necessary macroeconomic adjustment. Stan himself practiced this pragmatic approach at the Bank of Israel, where he dealt with large capital inflows, first through reserve accumulation and then reserve requirements on inflows. In the context of the challenges faced by our members of the euro area, the Fund has been helping the euro area as it seeks solutions to its difficult cyclical problems while pushing on with ever-closer fiscal and financial integration.

In the second area, the conference program explores the effect of the recent crisis on monetary policy frameworks. Some papers carefully document the evolution of the Federal Reserve’s policies and market communication as the crisis has progressed, and examine the costs and benefits of a higher inflation target or a nominal income target. They also assess the role of accommodative monetary policies in mitigating the extensive supply-side damage wrought by the financial crisis. While emphasizing the beneficial role of these types of policies, they also point out that policymakers should take into account how unconventional monetary policies can adversely affect financial stability and inflation.

The IMF has also worked on the implications of unconventional monetary policies. Our findings indicate that unconventional monetary policies were very successful in stabilizing financial markets early in the global financial crisis. These policies have also had positive effects on economic activity and inflation in countries that practiced them. During the crisis, Stan was ahead of the curve in the use of unconventional policies as he launched a program of quantitative easing in 2009. Consistent with the findings presented in the conference, our research also recognizes some of the potential risks associated with the prolonged use of such policies: complacency in the reform agenda, financial stability, and central bank credibility. Overall, however, these policies have so far been beneficial on net both for advanced economies and on a global basis. We surely need to have a better understanding of the national impact of these policies and their cross-border spillover effects. The conference papers usefully add to our knowledge on these difficult topics on which the Fund also has an active research program.

In the third area, several papers cast light on the fiscal policy response to crises. The importance of the fiscal stance is a central issue in some of the papers that study the performance of Latin American economies in the recent crisis and that of East Asian economies during the 1997-98 crisis. These papers draw implications of these episodes for the recent European experience, and claim that the stance of fiscal policy has been a key factor in the growth performance of some crisis countries in the region.

The IMF’s work has also confirmed the vital role of fiscal policy, especially in the prevailing crisis environment. We have recently produced a policy paper summarizing the major findings of cutting edge research on fiscal policy. Evidence from research conducted since the crisis suggests that fiscal policy can be an effective recession-fighting tool under certain conditions: when monetary policy is constrained at the lower bound, when the financial sector is impaired, or in deep slumps. In order to have the fiscal space to be able to conduct countercyclical policy, and in light of the newly witnessed vulnerabilities of advanced economies to sovereign debt crises, the roadmap for medium-term fiscal consolidation is also critically important. To be successful, the necessary fiscal adjustment should be anchored by strong fiscal institutions and credible, yet flexible, fiscal rules.

This conference provides an opportunity to take stock, to exchange views, and to expand the reach of economic analysis for policy making. The Economic Forum, scheduled for tomorrow afternoon and focusing on policy responses to crises, also promises to be an eye-opening event with an excellent list of panelists. One of the questions they will discuss is whether we are ready to handle the next potential crisis. Even if we are unable to provide a precise answer to this question, we are all well aware that our research efforts will be critical in preparing us to meet the challenges of the next possible episode. And this year’s conference presents an excellent opportunity to advance our knowledge towards that direction.

Stan started up the IMF Annual Research Conference in 2001 as he had the foresight to realize that the Fund could make a contribution and gain from a high-profile research forum. I cannot think of a better way to celebrate his many contributions than this conference on the theme of crises and with the outstanding cast of speakers here. Let me conclude by saying that I am very pleased to see you all here, and I look forward to having a festive celebration of Stan’s work while having productive discussions over the next two days.