IMF Survey : IMF Brings Together Top Economic Thinkers to Debate Crises
IMF News, November 20, 2013
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Bibliographic details
- Authors: M. Ayhan Kose, Rafael Portillo
- Published: November 20, 2013
Conference overview
- Event: The Fourteenth Jacques Polak Annual Research Conference, hosted by the IMF at its Washington, D.C., headquarters on November 7 and 8.
- Purpose: Forum to discuss recent research on financial crises and honor Stanley Fischer’s contributions to economic research and policy.
- Contributors: Leading economists and policymakers, including presentations and a concluding session featuring Larry Summers, Ken Rogoff, Stanley Fischer, Ben Bernanke, and Olivier Blanchard.
- Framing observation: “Great minds do not always think alike,” highlighting the value of debate for paradigm-shifting events.
Exchange rate regime: a central choice
- Key proposition (Paul Krugman): Likelihood of a confidence crisis greatly depends on the exchange rate regime; countries that retain their own currencies are less likely to face runs on their debt, and runs that do occur are likely to have expansionary effects on activity.
- IMF staff findings (Atish Ghosh, Jonathan Ostry, Mahvash Qureshi): Countries with less flexible exchange rate regimes tend to face greater macroeconomic and financial vulnerabilities.
- Empirical evidence (Kristin Forbes and Michael Klein): Large currency depreciations and major reserve sales help promote growth shortly after a crisis; interest rate increases appear to have the opposite effect.
- Policy nuance (Emmanuel Farhi with Iván Werning): Temporary capital controls—even under a flexible exchange rate regime—can help smooth out capital-flow driven business cycles.
- Policy implication: Exchange rate flexibility, reserves management, and calibrated capital-flow measures matter for crisis resilience.
Structural and fiscal policies: lessons from past crises
- Japan case (Takeo Hoshi and Anil Kashyap): Delay in bank recapitalization and lack of structural reforms helped explain prolonged stagnation in Japan during the 1990s; these lessons are relevant for some European countries slow to undertake reforms.
- Fiscal policy role: Papers document a potent role played by fiscal policy during the East Asian and Latin American crises; the stance of fiscal policy has been a major determinant of economic performance in peripheral European countries in recent years.
- Regional improvement (Latin America): Presentations confirm that macroeconomic policy has improved considerably in many emerging Latin American economies, with monetary and fiscal policies increasingly becoming countercyclical.
- Policy implication: Prompt bank recapitalization, structural reforms, and countercyclical fiscal policies strengthen recovery prospects.
Following Fischer’s prescriptions and monetary innovations
- Fischer’s 2001 prescriptions (as discussed by Maurice Obstfeld): Emerging markets broadly followed recommendations of greater exchange rate flexibility, ample reserves, and moderate public debt levels—factors that helped them weather the global financial crisis.
- Monetary policy research (U.S. Federal Reserve staff papers):
- Hysteresis hypothesis: Depressed demand may have decreased potential output over time; expansionary monetary policies can be beneficial.
- Forward guidance with thresholds: Fed’s use of forward guidance with thresholds has helped improve macroeconomic outcomes even when interest rates are constrained by the zero lower bound.
- Policy implication: Exchange rate flexibility, reserve buffers, moderate public debt, expansionary monetary policy when warranted, and forward guidance are important tools in crisis management.
Final session: crisis management insights from senior policymakers
- Ben Bernanke:
- Emphasized historical perspective and parallels between the financial panic of 1907 and the recent crisis.
- Identified key aspects of crisis management: liquidity provision, measures to restore public confidence in the financial system, and closure of regulatory gaps after the crisis subsides.
- Stanley Fischer:
- Three lessons from the global financial crisis: effectiveness of unconventional monetary policies such as credit easing; importance of quick action to fix banking and debt problems; role of macroprudential supervision to address systemic financial risks.
- Noted difficulty of predicting the next crisis: “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:
- Stressed early diagnosis of liquidity and solvency problems, using a medical analogy: delayed treatment of chronic conditions makes crises harder to remedy.
- Argued that deep financial crises require forceful and innovative policy responses.
- Larry Summers:
- Raised the possibility of “secular stagnation” in the United States and that zero nominal interest rates may be a durable feature.
- Called for more aggressive fiscal and monetary policies to lay foundations for durable growth.
- Warning: “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.”
- Overarching message: Liquidity provision, rapid repair of banking/debt problems, macroprudential supervision, early diagnosis of solvency issues, and a willingness to use aggressive fiscal and monetary tools are central to effective crisis response.
Key takeaways and policy recommendations
- Exchange rate and reserves:
- Greater exchange rate flexibility and ample reserves can reduce vulnerability to confidence crises.
- Temporary capital controls can be useful even with flexible exchange rates to smooth capital-flow driven cycles.
- Financial sector actions:
- Quick bank recapitalization and structural reforms prevent prolonged stagnation.
- Macroprudential supervision is essential to address systemic risks.
- Fiscal and monetary policy:
- Countercyclical fiscal policy and forceful, innovative monetary policy (including unconventional tools and forward guidance) support recovery.
- Be prepared to use more aggressive fiscal and monetary measures when structural conditions (e.g., potential secular stagnation) warrant.
- Crisis management principles:
- Provide liquidity, restore public confidence, close regulatory gaps, and diagnose liquidity versus solvency problems early.
- Recognize limits of prediction and prepare adaptable policy toolkits.
IMF Survey — By M. Ayhan Kose and Rafael Portillo, November 20, 2013
Content in this bundle
- Charipdf (PDF)
- Degpdf (PDF)
- Englishpdf (PDF)
- Farhipdf (PDF)
- Forbespdf (PDF)
- Hoshipdf (PDF)
- Krugmanpdf (PDF)
- Maurypdf (PDF)
- Ostrypdf (PDF)
- Veghpdf (PDF)
- Wilcoxpdf (PDF)