The conference concluding session featured (l-r) Larry Summers, Ken Rogoff, Stanley Fischer, Ben Bernanke and Olivier Blanchard (IMF photo)
Annual Research Conference
The Fourteenth Jacques Polak Annual Research Conference, hosted by the IMF at its Washington, D.C., headquarters on November 7 and 8, also honored Stanley Fischer’s lifelong contributions to economic research and policy. Fischer was first a faculty member at the Massachusetts Institute of Technology (MIT), and then a senior policymaker at the World Bank, the IMF (First Deputy Managing Director from 1994-2001), and finally Governor of the Bank of Israel. Leading economists and policymakers, many of whom had studied or worked with him, participated in the conference.
Exchange rate regime: a central choice
The importance of the exchange rate regime for understanding crises and their aftermath was an emphasis of many of the conference papers. In his provocative Mundell-Fleming lecture, Paul Krugman—Nobel laureate, Professor at Princeton University, and New York Times columnist— argued that the likelihood of a confidence crisis greatly depends on the exchange rate regime. Using a combination of theory and historical case studies, he demonstrated how countries that retain their own currencies are less likely to face runs on their debt; even if they do, the impact on activity is likely to be expansionary.
Atish Ghosh, Jonathan Ostry, and Mahvash Qureshi, researchers at the IMF, showed that countries with less flexible exchange rate regimes tend to face greater macroeconomic and financial vulnerabilities. Kristin Forbes and Michael Klein, professors at MIT and Tufts University respectively, reported that both large currency depreciations and major reserve sales help promote growth shortly after a crisis, whereas interest rate increases appear to have the opposite effect.
These findings do not necessarily imply that fully flexible exchange rates are the only available option for economies hit by external shocks. For example, Emmanuel Farhi of Harvard University, presenting joint work with Iván Werning of MIT, argued that temporary capital controls—even under a flexible exchange rate regime—help smooth out capital-flow driven business cycles.
Structural and fiscal policies making a difference
A number of other papers drew lessons from past crises for the ongoing recovery. Takeo Hoshi of Stanford University, presenting his joint work with Anil Kashyap of the University of Chicago, provided evidence that the delay in bank recapitalization and lack of structural reforms helped explain the prolonged stagnation in Japan during the 1990s. He argued that the Japanese experience provides critical lessons for some European countries that have been slow in undertaking the necessary policy measures.
Yet other papers documented the potent role played by fiscal policy during the East Asian and Latin American crises. Based on the lessons from these episodes, they concluded that the stance of fiscal policy has been a major determinant of economic performance in the peripheral European countries in recent years.
Following Fischer’s prescriptions
Maurice Obstfeld, professor at the University of California at Berkeley, discussed a set of policy recommendations that Stanley Fischer had presented in 2001, based on his experience during the crises of the 1990s. Obstfeld concluded that emerging markets by and large have followed Fischer’s recommendations during the past decade—namely, greater exchange rate flexibility, ample reserves, and moderate public debt levels, all of which have helped them weather the global financial crisis.
Other presentations that focused on the recent experience of Latin American countries in light of earlier crises in the region also confirmed that macroeconomic policy has improved considerably in many emerging Latin American economies, with monetary and fiscal policies increasingly becoming countercyclical.
Two papers by staff of the U.S. Federal Reserve (Fed) provided an insiders’ account of many innovations in monetary policy over the past five years. One explored the possibility that depressed demand may have decreased potential output over time, a hypothesis known as hysteresis, and emphasized the potentially beneficial role of expansionary monetary policies. The other argued that the Fed’s use of forward guidance with thresholds has helped improve macroeconomic outcomes, even when interest rates are constrained by the zero lower bound.
It’s not over ’till it’s over
The final session also brought together academics and policymakers, past and present, whose presence added considerable intellectual weight to the conference proceedings. Ben Bernanke, Federal Reserve Chairman, first observed that “Stanley Fischer frequently counseled his students to take an historical perspective, which is good advice in general, but is particularly helpful for understanding financial crises, which have been around for a long time.”
He then drew strong parallels between the financial panic of 1907—which eventually led to the creation of the U.S. Federal Reserve—and the recent crisis to identify key aspects of crisis management: liquidity provision, measures to restore public confidence in the financial system, and the closure of regulatory gaps after the crisis subsides.
Stanley Fischer discussed three lessons from the global financial crisis: the effectiveness of unconventional monetary policies such as credit easing; the importance of quick action to fix banking and debt problems; and the role of macroprudential supervision to address systemic financial risks. Fischer also mentioned the difficulty of predicting the next crisis. He noted that crises have many different sources, saying that “generals prepare for the last wear, economists prepare for the last crisis, and sometimes the last war is very similar to the next war, and sometimes it isn’t.”
Kenneth Rogoff, professor at Harvard University and a former Director of the IMF Research Department, emphasized the importance of the early diagnosis of liquidity and solvency problems during a crisis, drawing on a medical analogy.
“There are cases where the patient arrives in the emergency room and hasn’t seen a doctor for some chronic condition which has now become severe,” he said. “It is a lot harder to treat the patient, and there have certainly been cases like that.” He claimed that deep financial crises require forceful and innovative policy responses.
Larry Summers, a professor at Harvard University and a former U.S. Treasury Secretary, acknowledged the force and creativity with which policymakers have dealt with the global financial crisis. However, he raised the possibility that the United States has entered a period of “secular stagnation” and that zero nominal interest rates have become a durable feature of the economy. Summers said that the latest crisis “is not over until it is over, and that is surely not right now.”
He called for more aggressive fiscal and monetary policies to lay the foundations for durable growth and noted that “one has to be concerned about a policy agenda that is doing less with monetary policy than has been done before, doing less with fiscal policy than has been done before.”
Five years into the onset of the global financial crisis, the world economy is still recovering slowly and some uncertainties and potential for destabilization persist. That is why conferences like the Jacques Polak Research Conference matter: they focus the best minds on assessing and addressing the underlying impact of crises.
