THE SEOUL PAPERS
Post-crisis Rethink at Asia Conference
IMF Survey online
February 25, 2010
- High-level meeting ponders how to reconstruct the world economy
- Five papers explore key finance, macroeconomic issues
- Traditional orthodoxies questioned, new solutions proposed
Top policymakers and academics from around Asia and G-20 countries have been meeting in Seoul to debate some of the most pressing issues to emerge from the worst economic slump since the Great Depression.
The one-day conference, organized by the Korea Development Institute (KDI) and International Monetary Fund (IMF) and entitled “How to reconstruct the world economy,” is centered around five papers prepared by IMF economists.
The “Seoul papers” represent a rethink of some traditional orthodoxies and are part of a larger reexamination of key macro and financial issues being undertaken by the IMF in response to the global economic crisis. The papers range from how to exit stimulus policies, through a reevaluation of macroeconomic policy, to proposals on strengthening the international financial architecture.
In an opening speech, the First Deputy Managing Director of the IMF, John Lipsky, said the papers did not represent the official IMF position, but reflected internal debate in the Fund.
“They are intended, in part, to be provocative,” he said.
Included among the proposals is a suggestion by the IMF chief economist, Olivier Blanchard, and his coauthors, that central banks might consider setting their target inflation rate at 4 percent, rather than the long-held ideal of 2 percent.
“Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions,” they write.
The proposal has already provoked considerable lively debate in the public arena and was warmly endorsed by the liberal economist, Paul Krugman.
The Seoul papers
The paper’s authors suggest it is too early to withdraw from crisis-response policies, but they propose five basic principles to guide an exit from macroeconomic stimulus. These include the need for consistency across policy instruments, flexibility, clear communication, ensuring strategies rely on market-based incentives, and the need for cross-country consultation and coordination.
Advanced economies face a daunting challenge to bring fiscal and monetary policy back to normalcy, suggest the authors, who then present elements of a strategy to restore economies back to health.
“Addressing the fiscal problem will require clarity of intent and firm political resolve: health and pension entitlement reforms, cuts in the ratio between other spending and GDP, and tax increases will be necessary.“
This paper addresses future sources of growth and asks how the world’s economies can avoid the global imbalances that precipitated the current crisis.
It warns that a failure to address remaining domestic and international distortions “could result in the world economy being stuck in midstream.”
If global growth is to be put on a more sustainable footing, it says, the United States will need to save more, whereas major surplus countries such as China will need to consume more domestically. Similarly, oil-exporting countries will be able to boost domestic demand, if oil prices remain stable or higher in the medium term.
Rethinking Macroeconomic Policy
As well as a rethink by the IMF chief economist about the ideal target inflation rate, this paper also questions whether financial stability—including asset price performance—should be an explicit goal of policy, and if so, how that should be achieved.
It notes that monetary policy is a blunt tool and suggests that better and more targeted instruments should be developed.
The Future Financial System
The economic crisis, with its origins in the financial sector, has sparked a deep reevaluation of the global financial system. This paper proposes a number of reforms, including widening the scope of regulation to include all systemically significant financial institutions and limiting excessive leverage and risk-taking, but warns against stifling innovation.
The international linkages highlighted by the crisis have underscored the importance of creating a new regulatory framework that is consistent across countries, say the authors.
Reforming the International Monetary System
This paper addresses the question of how a new international financial architecture, and in particular a strengthened international monetary system, can help address some of the current challenges.
It discusses how the monetary system could be structured to dissuade economies from building up reserves to insure against capital account crisis—an issue that has long preoccupied the Fund (see: Exchange Rate Regimes and the Stability of the International Monetary System, March 2010)The paper proposes alternative insurance arrangements to mitigate this precautionary demand for reserves, while exploring a menu of alternative reserve assets which, the authors suggest, “could offer sustained stability and efficiency.”