Rethinking Macroeconomic Policy

IMF Blog, April 29, 2013

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Rethinking Macroeconomic Policy

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Bibliographic details

• Authors: Olivier Blanchard
• Published: April 29, 2013

Overview

• Author: Olivier Blanchard
• Date: April 29, 2013
• Note: Versions in عربي, 中文, Français, Русский, and Español
• Core message: Post-crisis rethinking and reform of macroeconomic policy, monetary policy, financial regulation, and macroprudential tools is underway but incomplete; substantial uncertainty remains about the final architecture and appropriate policy mix.

1. Navigating by sight — Financial regulation

• Findings and observations:
  • No agreed vision of future financial architecture or appropriate financial regulation.
  • Areas of uncertainty include the role of securitization, the scope for derivatives, markets versus banks, and shadow banking versus banking.
  • Policymakers are implementing measures such as increases in required capital ratios.
  • Disagreement persists on effects of capital ratios on funding costs and lending:
  • Some argue banks can afford substantially higher capital ratios (reference to Martin Hellwig and Anat Admati).
  • Others argue higher ratios would "destroy the banking industry."
  • Capital flows and capital controls: hard econometric evidence on the benefits of portfolio flows described as "surprisingly meager" (Helene Rey); question raised about the usefulness of short term capital inflows (Stanley Fischer).

2. Navigating by sight — The role of the financial sector

• Findings and questions:
  • Macroeconomic thinking understated financial factors in economic fluctuations; recent analytical work reintroduces the financial system into models but consensus is lacking.
  • Open questions:
  • Is there a separate credit and financial cycle distinct from the business cycle (Claudio Borio)?
  • Are financial shocks simply another disturbance or central to macroeconomic fluctuations?
  • Should macroeconomics be reconsidered for rare events ("once every hundred years", Stephan Gerlach)?
  • Policy implication:
  • No agreement on integrating financial stability with macro stability in central bank mandates.
  • Debate between continuing inflation targeting versus alternatives (e.g., nominal income targeting as discussed by Michael Woodford).
  • Author's view: be realistic about limits of macroprudential tools; monetary policy cannot ignore financial stability.

3. Navigating by sight — Macroprudential tools

• Empirical lessons:
  • Macroprudential tools "work", but:
  • Their effects are hard to calibrate.
  • They appear to moderate rather than stop unhealthy booms (consistent with Governor Kim’s presentation).
  • Macroprudential measures affect specific sectors and groups and raise political economy issues (example: loan-to-value ratios in Israel, discussed by Stanley Fischer).
• Policy questions:
  • Whether macroprudential policy will become the "third leg" of macroeconomic policy or remain a crutch to fiscal and monetary policy.

4. Navigating by sight — Governance and allocation of tasks (MIP, MAP, MOP)

• Conceptual stance:
  • Macroprudential regulation should account for systemic effects and the state of the economy when considering bank regulation.
  • Examples: higher capital ratios for systemically important banks or when aggregate credit growth appears too high.
• Practical governance challenges:
  • Potential conflict if microprudential supervisors ignore systemic aspects while macroprudential supervisors emphasize them.
  • Coordination needed between microprudential, macroprudential, and monetary policy because:
  • Monetary policy affects risk taking.
  • Macroprudential tools affect aggregate demand.
• Institutional arrangements discussed:
  • Suggestion to place both monetary policy and macroprudential responsibilities within the central bank, with concerns about central bank independence for setting tools like loan-to-value and debt-to-income ratios.
  • United Kingdom’s approach cited as an example: creation of a Financial Stability Committee able to impose time- and sector-varying capital ratios; two parallel committees within the central bank—one for monetary policy, one for financial policy with a limited set of macroprudential tools—presented as a reasonable model.
  • Stanley Fischer’s analogy: "various degrees of independence" as a practical solution.

5. Navigating by sight — The sustainable level of debt

• Context and scale:
  • Many countries will manage levels of debt "close to 100 percent of GDP" for many years.
• Two main costs of high debt emphasized:

1. Debt overhang:

• Higher debt increases probability of default, raises spreads on government bonds, and complicates achieving debt sustainability.
• Higher sovereign spreads raise private lending spreads, reducing investment and consumption.
• Higher uncertainty about debt sustainability affects decisions via expectations about future inflation and taxation.
• Limitation noted: reduced-form regressions of growth on debt have limited explanatory power.

2. Risk of multiple equilibria:

• At high debt levels, two equilibria may exist:
• A "good equilibrium": low rates and debt sustainability.
• A "bad equilibrium": high rates, higher interest burden, and higher default probability.
• Small changes in investor sentiment can shift outcomes from good to bad equilibrium.

• Empirical puzzle:
  • Example: Italian and Spanish bond spreads—possible role of differences in monetary policy and market expectations (Bank of England versus European Central Bank mandates) raised by Martin Wolf.

6. Navigating by sight — Multiple equilibria and communication

• Role of announcements and expectations:
  • Announcements can remove sources of multiple equilibria. Example: ECB’s Outright Monetary Transaction program—its announcement reduced redenomination risk without actual use.
  • Bank of Japan’s announcement to "double the monetary base":
  • Effect on inflation depends on whether households and firms revise inflation expectations upward.
  • If expectations rise, wage and price decisions may change, producing higher inflation (desirable in deflationary context).
  • If expectations do not change, inflation may not increase much.
  • Monetary policy effects can be psychological and depend heavily on expectation formation, not just mechanical textbook channels.
• Policy implication:
  • Coordination of monetary announcements and other policy measures is critical to shift perceptions and price dynamics.

Research agenda and institutional intent

• The conference leaves a clear research agenda on:
  • The design of financial regulation and capital requirements.
  • The integration of the financial sector into macroeconomic models.
  • Calibration and political economy of macroprudential tools.
  • Governance structures for coordination among microprudential, macroprudential, and monetary authorities.
  • Dynamics of debt sustainability, debt overhang, and multiple equilibria.
  • The role of communication and expectations in monetary policy effectiveness.
• IMF commitment: "We, at the IMF, fully intend to take up the challenge."

Source: IMF IMFBlog — "Rethinking Macroeconomic Policy", Olivier Blanchard, April 29, 2013. The views expressed are those of the author and do not necessarily represent the views of the IMF and its Executive Board. The IMF is an organization of 191 countries.

Content in this bundle

• 反思宏观经济政策, 奥利维尔•布兰查德
  • 反思宏观经济政策, 奥利维尔•布兰查德 (Markdown version)
  • 反思宏观经济政策, 奥利维尔•布兰查德 (PDF)
• Переосмысление макроэкономической политики; Оливье Бланшар; Блог iMFdirect; 29 апреля 2013 года
  • Переосмысление макроэкономической политики; Оливье Бланшар; Блог iMFdirect; 29 апреля 2013 года (Markdown version)
  • Переосмысление макроэкономической политики; Оливье Бланшар; Блог iMFdirect; 29 апреля 2013 года (PDF)

References

• عربي
• conference
• recent paper
• Rethinking Macroeconomic Policy conference in 2011