IMF’s Blanchard addresses research conference, calling for monetary policy to move beyond singular focus on inflation (photo: IMF)
IMF RESEARCH CONFERENCE
Participants—among them some of the world’s most renowned macroeconomic theorists and practitioners—came to the March 7-8 event with a common view on the need for new approaches to macroeconomic policy. “The crisis has challenged a lot of theoretical notions,” said Mexico’s central bank Governor Guillermo Ortiz.
Echoing this sentiment, conference co-host and Nobel Prize winner Joseph Stiglitz added that “the models that were used before the crisis neither predicted the crisis nor gave us a framework for responding to the crisis when it happened.”
The operation of financial and other markets also came under the microscope. The pre-crisis conventional wisdom that increased liquidity in financial markets would promote efficiency and financial stability had been proved wrong, according to Adair Turner, Chairman of the U.K. Financial Services Authority.
Balanced, forward looking debate
But this conference was not the standard retrospective on the policy failings or theoretical gaps that may have contributed to the crisis. Organizers and participants were focused on discussing the future of macroeconomic policy.
“The conference made an important contribution to invigorating a balanced debate about reforming macroeconomics,” Stiglitz said.
Given the range and depth of post-crisis policy challenges, the period ahead will be a busy time for economists. We should not expect quick fixes in macroeconomic policymaking.
“No one argued that there was widespread agreement about a simple set of rules for achieving macroeconomic stability, robust growth, and shared prosperity. Indeed, no one proposed such a set of rules,” according to fellow conference co-host David Romer (University of California, Berkeley).
Policies need to take account of the complex financial and economic linkages within and between countries in today’s globalized world.
“As a profession we have to develop the analytical tools to understand better the interaction between the real sector and the financial system and the interconnection between markets and institutions,” Ortiz said.
Monetary and financial linkages
Given that the global crisis originated in the U.S. financial system, the need for policies to better account for financial sector behavior and risks was a recurring theme at the conference.
The “elegant and conceptually simple” pre-crisis policy framework needs to be re-examined, argued IMF Chief Economist Olivier Blanchard. In particular, he and others called for monetary policy to move beyond a singular focus on inflation, and also address financial stability and economy activity.
More attention is needed on factors affecting the availability of credit, and the regulation and supervision of financial risks—so-called ‘macroprudential’ factors. Stiglitz even suggested that the practice in some countries of separating the responsibility for monetary policy and financial stability is “fundamentally flawed.”
Some, however—particularly from emerging market countries with more recent histories of high inflation such as Ortiz and former Brazilian central bank governor Arminio Fraga—warned that we should not lose sight of tackling inflation.
Blanchard agreed, noting that monetary policy’s success in maintaining expectations of low and stable inflation “helped enormously in the crisis.”
Stimulate or not?
Crisis-related lending to the financial sector and sovereign debt concerns in financial markets revealed the complex relationships between monetary, financial, and fiscal policies.
Recent stimulus packages demonstrated that fiscal policy can play a role in keeping the economy afloat in times of crisis, what was once thought to be the realm of monetary policy. “We need fiscal tools for short-run stabilization,” Romer said.
Both he and Robert Solow (Professor Emeritus, Massachusetts Institute of Technology) also warned that eventually actions would be needed to address associated risks. “Any aggressive fiscal policy would entail still a bigger buildup of debt, which will have to be settled in the longer run,” Solow said.
Yet others felt that more timely action was needed to avoid a too large accumulation of debt and, according to Partho Shome, Chief Executive of the Indian Council for Research on International Economic Relations, to “re-balance [the] intergenerational burden of government fiscal policy.”
Balancing policy tensions
Policymakers face a similar tension in the financial sector, needing to avoid excessive risk while not starving the economy of credit.
Jacob Frenkel (Chairman, JPMorgan Chase International) summed this up: “How can we live in a world in which, on the one hand, the health of the financial system requires deleverage; on the other hand, the health of the economic system does not require deleverage?”
Deleveraging refers to the process of a company or institution unwinding the amount of debt on its books.
Opinions differed on the need for regulatory reform and the feasibility of global oversight of the financial system. The tools available to policymakers may be appropriate, but “government actions with the best intentions can actually exacerbate some of the instability,” argued Frenkel.
Echoing sentiments from the monetary policy session, others saw merit in macroprudential measures aiming to contain dangerous levels and types of financial activities, and had already been used to good effect in some countries according to Hyun Song Shin (Princeton University).
There were also a range of views on capital controls. “It was clear that some people believe capital controls work and some don’t,” said Blanchard. Some thought a judicious use of controls could be effective, whereas others, such as Fraga, thought they could be counterproductive by diverting attention from underlying macroeconomic problems.
Ongoing dialogue
A key goal of the conference is to promote an ongoing dialogue that extends beyond the conference and outside corridors of the IMF. Blog posts by conference organizers and videos of the conference proceedings—available on the conference website—have already generated a lively online debate.
There was consensus that discussions in all six sessions—monetary policy, fiscal policy, financial intermediation and regulation, capital account management, growth strategies, and the international monetary system—provided good direction for new areas of research and policy deliberation.
