IMF Survey: Blanchard Sees Global Economy Weathering Financial Storm

IMF News, September 2, 2008

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Two major shocks drive the current crisis: "the oil and commodity shock and the financial shock."
Effects of the oil/commodity shock:
- "The effects of the first have been much smaller than one would have feared based on similar shocks in the 1970s."
- Reason: "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."
Effects of the financial shock:
- "The effects of the second have been much bigger than most of us expected when the crisis started."
- Reason: "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."
Interaction and complexity:
- The combination of the two shocks makes the crisis "so complex."
- Policy trade-offs: "The lower interest rates which would help fight the financial crisis run against the risk of inflation triggered by the oil shock."
- Risk scenarios: "One can think of many bad scenarios where low activity makes the financial crisis worse, and macroeconomic policy has little room for maneuver."
Alternative (optimistic) scenario:
- "If the price of oil stabilizes, I believe we can weather the financial crisis at limited cost in terms of real activity."
- Specific hypothetical: "If, for example, the price of oil returned toward $100—not a crazy scenario...—then inflation pressure would rapidly subside, and I would be even more optimistic."

Blanchard identifies at least three roles for the IMF:
- "First, provide advice to countries, or groups of countries, about appropriate macroeconomic policies."
- "Second, make it easier for countries in macroeconomic trouble to borrow by providing them with commitment devices, namely adjustment plans."
- "Third, help policymakers coordinate policies, if only through better exchange of information and better understanding of policy intentions."
Practical observations:
- Rich countries "may not need [advice] very much, although it is often useful to remind them politely of basic economic principles."
- The Fund "seems to provide a natural environment for such flexible-sized, multilateral discussions, virtual or physical."
- No fixed "magic number—7, 8, 24, or any other—for the right-size G-group meeting; it all depends on the issue at hand."

Personal and professional timeline:
- "I crossed the ocean from France in 1973 to start a PhD in economics at the Massachusetts Institute of Technology (MIT)."
- Academic posts: "at Harvard from 1977 to 1982, and at MIT since then."
- Took up the post of Director of the IMF's Research Department "as of September 1."
- Interview published: "September 2, 2008."
Research orientation and attraction to the IMF:
- Enjoys "look[ing] at a complex set of facts, find[ing] a conceptual structure to make sense of it, write[ing] down a simple formal model which captures it, and then see[ing] where it takes me, policy implications and all."
- Sees the IMF job as "in many ways, a dream job" given the complexity of the current crisis and opportunity to influence policy.

Central premise: "The credibility of the IMF depends on the quality of the economic advice it delivers."
How to strengthen research and advice:
- Combine "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."
- Maintain and rely on "the required talent" already in the Research Department.
- Acknowledge strengths: "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."
- Identify organizational issues: "The organization of the department, and the set of products delivered by the department, strikes me however as slightly haphazard..."
Planned actions:
- "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."
- Will "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."

Source: IMF Survey online, September 2, 2008.