Exploring Economic Policy Frontiers After the Crisis: 2010 IMF Research Conference
IMF Blog, November 19, 2010
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Bibliographic details
- Authors: Olivier Blanchard
- Published: November 19, 2010
Conference context and purpose
- Conference focused on where economists and policymakers went wrong and implications for macroeconomic theory and macroeconomic policy making after the crisis.
- First conference since the passing of Jacques Polak; conference framed as a tribute to Jacques, described as “a leader of critical thought during the post-war evolution of the global economy.”
- Twelve papers were presented, providing the basis for two days of discussion among researchers and policymakers on post-crisis policymaking.
Major themes from the conference
- Fiscal policy and public debt
- The crisis increased attention to fiscal policy and rising public debt in advanced economies.
- Papers addressed:
- A framework for assessing fiscal maneuver (fiscal space) by comparing current debt levels with sustainable debt based on each country’s track record with fiscal adjustment.
- The optimal timing of fiscal consolidation when monetary policy is constrained by the zero lower bound.
- Evidence that a commitment to future consolidation can generate an immediate stimulus by lowering the long-run risk premium.
- Key policy difficulty: making future consolidation commitments credible today.
- Monetary policy, financial conditions, and the real economy
- Monetary policy can lessen adverse effects of financial disruptions on the real economy.
- Papers and findings:
- A quantitative macroeconomic model showed how negative feedback between the financial sector and the real economy produced the deep contraction in the 2007-09 crisis.
- Policy simulations demonstrated macroeconomic benefits of a monetary policy rule that allows the policy rate to respond to changes in financial conditions.
- Evidence that lax monetary policy leads to a decline in risk aversion in financial markets; this effect should be considered in monetary policy design.
- Central policy question: whether adjustments should be via the policy rate or via macro prudential measures.
- International capital flows and financial stability
- International capital flows can weaken financial stability.
- Papers and insights:
- A model of “hot money episodes”: crises in one country can push global investors to seek other destinations, generating inflows that may be followed by another crisis.
- International financial integration without fiscal integration can result in an undersupply of safe assets (high-grade sovereign bonds) and spread financial fragility.
- Relevance to observed capital flows to safe havens and emerging market countries highlighted.
- Financial sector regulation and macroprudential policy
- Given the financial sector’s central role in the crisis, regulatory design and its interplay with the real economy were central.
- Papers emphasized:
- Government bailouts that are highly likely in deep crises can make firm behavior less efficient; regulation should reduce distortions from expected bailouts.
- The need to balance regulation: overly light regulation plus bailout expectations can encourage risky behavior and excessive expansion of the financial sector; overregulation to prevent crises can stifle economic growth.
- Macro prudential regulation featured prominently:
- Anil Kashyap’s Mundell-Fleming lecture focused on fire sales—asset sales at an excessive discount—as a source of financial and economic instability, with implications for macro prudential design.
- Macro prudential themes were debated in the Economic Forum concluding session.
Overarching takeaways
- The conference contributed to the post-crisis policy debate and underscored unresolved questions, including:
- Interaction between monetary policy and financial markets.
- The meaning and measurement of fiscal sustainability.
- The design and calibration of macro prudential regulation.
- Continued research is required to inform policy on these fronts.
Olivier Blanchard, November 19, 2010 — Exploring Economic Policy Frontiers After the Crisis: 2010 IMF Research Conference
Content in this bundle
- Executive Summary
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- Risk, Uncertainty and Monetary Policy
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