Macroeconomic Management When Policy Space is Constrained: A Comprehensive, Consistent and Coordinated Approach to Economic Policy

Staff Discussion Notes, September 28, 2016

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Macroeconomic Management When Policy Space is Constrained: A Comprehensive, Consistent and Coordinated Approach to Economic Policy

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Bibliographic details

• Authors: Vitor Gaspar, Maurice Obstfeld, Ratna Sahay, Douglas Laxton, Dennis P Botman, Kevin Clinton, Romain A Duval, Kotaro Ishi, Zoltan Jakab, Laura Jaramillo, Constant A Lonkeng Ngouana, Joannes Mongardini, Susanna Mursula, Erlend Nier, Yulia Ustyugova, Hou Wang, Oliver Wuensch
• Published: September 28, 2016
• Series: Staff Discussion Notes
• DOI: https://doi.org/10.5089/9781475537543.006

Executive summary and central finding

• The recovery in GDP growth since the global financial crisis has been halting and weak.
• There is widespread concern that countercyclical policies have run out of space or lack the power to raise growth or deal with the next negative shock.
• The note argues that room exists for effective policies and that it should be used if appropriate.
• The most promising route involves a comprehensive, consistent, and coordinated approach to policy making.
• Policy coordination adds particular value if the current approach falls short of reviving growth, or in the event of a further downward shock.

Analysis: why the three Cs matter

• Comprehensive policy actions within a country:
  • Exploit synergies across instruments, making the whole greater than the sum of parts.
• Consistent policy frameworks:
  • Anchor long-term expectations while allowing decisive short- to medium-term accommodation whenever necessary.
• Coordinated policies across major economies:
  • Amplify the helpful effects of individual policy actions through positive cross-border spillovers.

Policy implications and recommendations

• Use available room for policy activism when appropriate rather than assume no policy space exists.
• Pursue comprehensive domestic policy packages that leverage interactions between monetary, fiscal, and financial sector policies.
• Maintain consistent frameworks to secure expectations and preserve scope for accommodation when needed.
• Seek coordination among major economies to enhance the global effectiveness of national policy actions, especially if revival of growth is insufficient or in case of a further downward shock.

Subjects, keywords, and technical focus

• Subjects: Accommodative monetary policy, Financial statements, Fiscal policy, Fiscal stimulus, Inflation, Monetary policy, Prices, Public debt, Public financial management (PFM)
• Keywords: Accommodative monetary policy, aggregate demand, Asia and Pacific, Canada, debt ratio, demand management, demand shock, financial sector policies, Financial statements, fiscal policy, Fiscal stimulus, forecast interest rate path, Global, global economy, incomes policy, Inflation, inflation expectation, interest rate path, Japan, labor market, monetary policy, monetary policy support, monetary policy transmission, policy interest rate rate constant, rate of inflation, reaction function, SDN, structural reforms, transmission mechanism

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• Staff Discussion Note
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