IMF Draws Lessons from the Crisis, Reviews Macro Policy Framework

IMF Blog, February 12, 2010

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Publication date: February 12, 2010
As the crisis slowly recedes, the IMF has started to reassess the conduct of macroeconomic policy.
The Fund published a paper, “Rethinking Macroeconomic Policy,” part of a series of policy papers prepared by IMF staff reassessing the macroeconomic and financial policy framework in the wake of the devastating crisis.
Several of the papers will be discussed at a conference to be held in Seoul, Korea, later this month.

Described as a short paper that "cuts to the heart of what macroeconomics got wrong before the crisis and what it teaches us about how policy must change."
The paper aims to question earlier conclusions about macroeconomic policy and re-evaluate intellectual guidance for the profession.
Olivier Blanchard (Fund’s Chief Economist) quoted: “It was tempting for macroeconomists and policymakers to take much of the credit for the steady decrease in cyclical fluctuations from the early 1980s on and to conclude that we knew how to conduct macroeconomic policy. We did not resist temptation. The crisis naturally forces us to question our earlier conclusions and that’s what we are trying to do in this paper.”

Paul Krugman dubbed the paper "interesting and important" in his New York Times blog.
Richard Adams in the Guardian described it as a “break with years of economic orthodoxy” and a “stunning turnaround.”
Financial Times editorial: the paper demonstrates that the IMF intends to "offer intellectual guidance to a profession confounded by its failure to see the crisis coming."
Economist's Free Exchange blog: "Perhaps the important thing to take away from this discussion is that to central bankers, inflation is a bogeyman. But to good economists, inflation is merely a variable, an economic indicator over which governments have some control and which they can manipulate to good or ill effect."
Joseph Stiglitz in La Tribune: Asked how the IMF handled the current crisis compared with the Asian crisis of the 1997-98, he said “Much better than last time!” and attributed the improved response partly to Managing Director Dominique Strauss-Kahn (DSK).

The paper "treads controversial ground" and proposes ideas to speed up fiscal policy, including automatic tax cuts or transfers triggered by thresholds such as a given rate of unemployment.
It also suggests central banks might aim for higher inflation to make room for more aggressive cuts.
The Financial Times notes one critique: "If not always convincing – why seek higher inflation instead of tools to enable negative nominal rates? – such high-calibre brainstorming is welcome."

The IMF advised large economies to implement stimulus policies during the recent crisis.
Contrast with the Asian crisis of 1997-98: during that episode the Fund had imposed austerity policies on affected emerging markets, a difference highlighted by Joseph Stiglitz.
The IMF, based in Washington D.C., is an organization of 191 countries, working to foster global monetary cooperation and financial stability around the world.

IMFBlog is a forum for the views of the International Monetary Fund (IMF) staff and officials on pressing economic and policy issues of the day.
The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.

Content from IMF blog post dated February 12, 2010.