Olivier Blanchard: The Future of Macroeconomic Policy
OB:
The Future of Macroeconomic Policy: Nine Tentative Conclusions « iMFdirect – The IMF Blog:
We’ve entered a brave new world in the wake of the crisis; a very different world in terms of policy making and we just have to accept it.
In the age-old discussion of the relative roles of markets and the state, the pendulum has swung—at least a bit—toward the state.
3. The crisis made it clear that there are many distortions relevant for macroeconomics, many more than we thought earlier. We had ignored them.... Regulation and agency theory applied to regulators is important. Behavioral economics and its cousin, behavioral finance, are central as well.
4. Macroeconomic policy has many targets and many instruments (that is, the tools we use or variables to implement policy). There are many examples of this that were discussed at the conference, but here are two. Monetary policy has to go beyond inflation stability, adding output and financial stability to the list of targets, and adding macro-prudential measures to the list of instruments. Fiscal policy is more than just “G minus T” and an associated “multiplier.”... Bob Solow made the point that reducing discussions about fiscal policy to what is the right multiplier does not do service to the issue.
5. We may have many policy instruments, but we are not sure how to use them.... We don’t quite know what liquidity is, so a liquidity ratio is one more step into the unknown. It was clear that some people believe capital controls work and some don’t....
6. Some instruments are politically hard to use... some macro-prudential tools work by targeting specific sectors, sets of individuals, or firms, and may lead to strong political backlash by those groups....
7. Where do we go from here? In terms of research, the future is exciting....
8. Things are harder on the policy front. Given we don’t quite know how to use the new tools and they can be misused, how should policymakers proceed?... Pragmatism is of the essence....
9. We have to keep our hopes in check. There are going to be new crises that we have not anticipated. And, despite our best efforts, we could have old-type crises again...
