Warning! Inequality May Be Hazardous to Your Growth


By Andrew G. Berg and Jonathan D. Ostry

Many of us have been struck by the huge increase in income inequality in the United States in the past thirty years. The rich have gotten much richer, while just about everyone else has had very modest income growth.

Some dismiss inequality and focus instead on overall growth—arguing, in effect, that a rising tide lifts all boats. But assume we have a thousand boats representing all the households in the United States, with boat length proportional to family income. In the late 1970s, the average boat was a 12 foot canoe and the biggest yacht was 250 feet long. Thirty years later, the average boat is a slightly roomier 15 footer, while the biggest yacht, at over 1100 feet, would dwarf the Titanic! When a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss.  

In fact, inequality matters. And it matters in all corners of the globe. Continue reading

Macroprudential Policy—Filling the Black Hole


By José Viñals

When the global financial system was thrown into crisis, many policymakers were shocked to discover a gaping hole in their policy toolkit.

They have since made significant progress in developing macroprudential policy measures aimed at containing system-wide risks in the financial sector. Yet progress has been uneven. Greater efforts are needed to transform this policy patchwork into an effective crisis-prevention toolkit. 

Given the enormous economic and human cost of the recent financial debacle, I strongly believe that we cannot afford to miss this opportunity for substantial reform. Continue reading

Reducing the Chance of Pulling the Plug on Liquidity


By Jeanne Gobat

The near collapse of the financial system that set off the global crisis was due in part to financial institutions suddenly lacking access to funding markets, and liquidity drying-up across securities markets.

Many financial institutions were unable to roll over or obtain short term funding without sustaining significant losses. This threatened to sink them.

Financial institutions did not factor in how their own responses to a liquidity shortfall could make the entire system shut down and less stable—that is, they underestimated their contribution to systemic liquidity risk in good times, and did not bear the cost of their actions on others in bad times.

It only takes a few institutions to pull the plug on a liquidity-filled bathtub before it runs dry, and the central bank needs to open the spigots again. Continue reading

Who’s Talking About the Future of Macroeconomic Policies


By iMFdirect

Open, wide-ranging, and balanced discussion. For Olivier Blanchard—and co-hosts David Romer, Michael Spence & Joseph Stiglitz—that was the goal of last month’s conference at the IMF on the future of macroeconomic policies after the global financial crisis. And it is exactly what they got.

The crisis was a wakeup call for theorists and policymakers… Economic models, policy tools, and how they are applied need to catch up with changes in the global economic and financial system.

 You’ve heard here about views from the conference, but there’s plenty of discussion going on outside the IMF. Here’s a snapshot…. Continue reading

South Africa’s Unemployment Puzzle


By Abebe Aemro Selassie

Among the havoc wrought by the global financial crisis, unemployment ranks at the top. This discussion often focuses on the situation in advanced countries. Unemployment in the United States, for example, continues to hover around 9 percent.

Take that and double it. Then you can begin—yes, just begin—to get a sense of the magnitude of the problem in South Africa. Unemployment in South Africa now stands at some 24 percent. Youth unemployment is phenomenally higher still at some 50 percent. Continue reading

New Policy Ideas for a New World: Interview with Robert Solow


By iMFdirect

There has been plenty of reflection, during the past few years, on the causes of the global financial crisis. But, last month’s conference at the IMF focused on taking what we’ve learned from the crisis and looking toward the future of economic policy.

Robert Solow—Professor Emeritus at Massachusetts Institute of Technology and Nobel Prize winning economist—was among those who brought interesting perspectives and a wealth of experience to the conference discussions.

Watch Professor Solow’s interview and hear more about what he has to say on… Continue reading

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