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Home > Blogs > Anthony Harrington > IMF seeks to define the lessons of the crash – part 1

IMF seeks to define the lessons of the crash – part 1

Fiscal stimulus | IMF seeks to define the lessons of the crash – Part 1 Anthony Harrington

In one of the most high powered mini events it has ever orchestrated, the IMF recently brought together four top economists, including Nobel Laureate Joseph Stiglitz, for a two day “group think” session (my term, not theirs). The format was a conference in Washington, entitled “Macro and Growth Policies in the Wake of the Crisis”.

A very select invited audience heard the four economists present their views on how the crisis has changed economic thinking and what this means for policy initiatives. Although the audience was not large, the IMF threw the whole event open to the world by streaming it in real time on the web. At the time of writing the conference was still available as a webcast on the IMF site and I would urge anyone even vaguely interested in the likely evolution of macro policy to watch whatever they can of it.

The IMF managing director Dominique Strauss-Kahn beat an airport delay that almost scuppered his introductory remarks to the conference, and gave what turned out with hindsight to be a prescient summary of much of the thrust of the conference. The old macro economic policy beloved of governments and central banks, which had the merit of beautiful simplicity, is going to have to change. The assumption that keeping inflation stable is of itself the simple key to achieving long term global stability, has been wrecked beyond repair.

The IMF’s chief economist, Olivier Blanchard gave the first presentation and kicked off on precisely this theme of the pre-crisis consensus on economic policy. He pointed out that the discovery that keeping inflation low and stable provides no guarantee, in and of itself, that we will secure optimum economic performance, has called forth demands for macro economic policy to include a focus on asset crises, on leverage and on measures of systemic risk. However, he argued, while these things might be important, “it is by no means obvious that such questions should be the primary target of monetary policy.”

He pointed out too, that as long as monetary policy simply boils down to setting rates to combat inflation, it is relatively easy for politicians to stand back and proclaim the independence of central banks. If central banks, on the other hand, start using cyclical tools such as raising or lowering loan to value ratios and other tools to target the sources of macro financial vulnerability more directly, if they start managing bank incentives to take on leverage and risk, they become enmeshed in the very fabric of the economy – where then is their independence? This is the kind of issue that is going to require a lot more research as the developed world comes out of the present crisis, he suggested.

Another imponderable is the issue of how fast financial stimulus should be withdrawn. The IMF was in the forefront of calling for fiscal stimulus to fight deflation in the heart of the crisis. But as we start to see weak growth how far should governments go in cutting expenditure and reining in on accommodative monetary policy? “We need more research here – the academics need to get involved,” he said.

Further reading on fiscal stimulus and quantitative easing:

Tags: Dominique Strauss-Kahn , fiscal stimulus , IMF , Joseph Stiglitz , lessons from the crash , macroeconomic policy
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