Blanchard: "If the price of oil stabilizes, I believe we can weather the financial crisis at limited cost in terms of real activity" (photo: Olivier Blanchard)
FINANCIAL, COMMODITY SHOCKS
Blanchard's new position also carries the title of IMF Chief Economist. In an interview with IMF Survey online, Blanchard spoke about the current crisis facing the global economy; the IMF's evolving role; his priorities for research; and what attracted him to join the Fund.
IMF Survey online: What are the current macroeconomic challenges facing the global economy?
When I thought about the role of the IMF previously, I thought that one of its jobs should be to imagine potential crisis scenarios, and think about the right contingent policies. There is less need for imagination today: We have a live crisis on our hands—although others could be coming—and we have to be ready for those as well.
Behind the current crisis are two major shocks: The oil and commodity shock and the financial shock.
The effects of the first have been much smaller than one would have feared based on similar shocks in the 1970s. The effects of the second have been much bigger than most of us expected when the crisis started.
In retrospect, we probably should not have been so surprised. Workers are much weaker than they were in the 1970s, and have no choice than to accept the real wage cuts implied by higher oil prices: this explains why the effects of the first have been so limited. In the financial sector, leverage is much higher than it used to be: this explains why the bad subprime loans have led to such enormous financial effects.
"If the price of oil stabilizes, I believe we can weather the financial crisis at limited cost in terms of real activity."
What makes the crisis so complex is the combination of these two shocks. I believe we have a good sense of how to handle each one separately. But the combination is tougher. The lower interest rates which would help fight the financial crisis run against the risk of inflation triggered by the oil shock. And one can think of many bad scenarios where low activity makes the financial crisis worse, and macroeconomic policy has little room for maneuver.
At the same time, one can easily think of more optimistic scenarios, and I actually see them as more likely. If the price of oil stabilizes, I believe we can weather the financial crisis at limited cost in terms of real activity. And if, for example, the price of oil returned toward $100—not a crazy scenario, as few of us understand how it got much above $100 in the first place—then inflation pressure would rapidly subside, and I would be even more optimistic.
IMF Survey online: How do you see the role of the IMF evolving?
Take what I am going to say as the opinion of an outsider coming in. I still have a lot to learn. But, to state the obvious: The IMF can and must play at least three roles:
First, provide advice to countries, or groups of countries, about appropriate macroeconomic policies. The rich countries may not need it very much, although it is often useful to remind them politely of basic economic principles. But, even for them, the current crisis shows the complexity of the issues and of the optimal policies.
Second, make it easier for countries in macroeconomic trouble to borrow by providing them with commitment devices, namely adjustment plans; while this role has waned recently, I am afraid some countries will get in trouble again, and the need will not go away.
Third, help policymakers coordinate policies, if only through better exchange of information and better understanding of policy intentions. There is no magic number—7, 8, 24, or any other—for the right-size G-group meeting; it all depends on the issue at hand. The Fund seems to provide a natural environment for such flexible-sized, multilateral discussions, virtual or physical.
IMF Survey online: What's your background and what attracted you to the Fund?
On where I come from: I crossed the ocean from France in 1973 to start a PhD in economics at the Massachusetts Institute of Technology (MIT). I intended to specialize in development but, soon after I arrived, I realized development economics, as a field, was barely alive, and the action was in macroeconomics.
I shifted, and wrote my thesis under Stan Fischer and Bob Solow. I have been working on macroeconomics ever since, at Harvard from 1977 to 1982, and at MIT since then. I still have very much of an interest in the macroeconomics of low-income countries, and I look forward to engaging with the issues faced by the low-income members of the IMF.
On why I came to the IMF: What has always turned me on most is to look at a complex set of facts, find a conceptual structure to make sense of it, write down a simple formal model which captures it, and then see where it takes me, policy implications and all.
I remember the thrill of going on trips with Rudi Dornbusch in the early 1980s, being exposed to an avalanche of facts, and then seeing Rudi make sense of it all, often demolishing received wisdom (and some of its high priests) in the process. I had the same thrill later, when looking at transition in Eastern Europe, or unemployment in Western Europe, or Chinese macroeconomic policy.
For somebody with my preferences, this job is, in many ways, a dream job. Think about how complex the current crisis is, and the challenge of making sense of it all. I am not sure I can. Indeed, I am not sure anybody can. But it is sure fun to try. And, maybe, in doing so, help make the world economy a better place.
IMF Survey online: In what directions do you intend to lead IMF research as Economic Counsellor?
The credibility of the IMF depends on the quality of the economic advice it delivers. And the quality of this advice depends, ultimately, on the quality of the research and analysis in the IMF in general, and in the Research Department in particular.
I think that the department is in a unique position to produce this research. It can and should do so by combining the results from academic research with the enormous amount of information accumulated by the Fund over the years—think of all the information contained in all the Article IV reports.
The required talent is definitely there, and this is fundamental. Indeed, I would not have come if I did not believe it to be the case. The research, be it on the analytical, modeling, or empirical side, is of very high quality. The World Economic Outlook is a tremendously useful document. The organization of the department, and the set of products delivered by the department, strikes me however as slightly haphazard, in part the result of history, once-hot issues, and past top-down requests. I think we can do better.
I intend to spend the next few months thinking about, and discussing with people in the department and in the Fund, what our output should be, and what reorganization may deliver this best. My plan is to ask somebody from outside the IMF but with an intimate knowledge of the Fund, to help me in that endeavor. There will be more details in the future.
Comments on this article should be sent to imfsurvey@imf.org
