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

Observations on the Evolution of Economic Policies


Guest post by Michael Spence, New York University,
Professor Emeritus Stanford University, and
co-host of the Conference on Macro and Growth Policies in the Wake of the Crisis

It was a privilege to participate in the IMF conference devoted to rethinking policy frameworks in the wake of the crisis. Highly encouraging was the openness of the discussion, the range of views, the willingness to question orthodoxy, and the posture of humility.

One gets the impression that the crisis has triggered a response that it should trigger, and we have embarked on a path of rethinking conceptual frameworks and policy choices in a way that will contribute to the stability of the system.

That said, the good news is that we recognize that in finance and parts of macroeconomics the models or frameworks are incomplete. That represents a challenge to the academic community. But it also means that, in the short run, participants and regulators will be operating with incomplete models. This will require judgments (which will be uncomfortable in contrast to the earlier sense of certainty). There will be mistakes. And, as Olivier Blanchard said in his excellent summary, we will proceed step-by-step, evaluating the impacts of policy choices and sometimes reversing course. Continue reading

The Future of Macroeconomic Policy: Nine Tentative Conclusions


By Olivier Blanchard

(Version in Français, Español)

The global economic crisis taught us to question our most cherished beliefs about the way we conduct macroeconomic policy. Earlier I had put forward some ideas to help guide conversations as we reexamine these beliefs. I was heartened by the wide online debate and the excellent discussions at a conference on post-crisis macroeconomic policy here in Washington last week. At the end of the conference, I organized my concluding thoughts around nine points. Let me go through them and see whether you agree or not. Continue reading

iMFdirect–Must Reads on Global Finance and Budgets


While 2011 is still shiny as a new penny we thought you might like a quick review of 2010’s hot topics in the global economy.  The iMF Direct Blog has picked our list of must read posts covering the highs and lows of global finance and government budgets and spending.

  1. The Ten Commandments for advanced economies to keep the economic recovery on track 
  2. The financial world remains the Achilles Heel of the global economic recovery 
  3. We explain the right mix of ingredients for countries to provide sufficient support to economic activity, and reassure markets in How to Bake a Fiscal Pie 
  4. Fixing the financial sector – Just Do It  
  5. Stable prices and financial stability go hand in hand, or do they? A Marriage Made in Heaven or Hell   
  6. What Must Be Done – the top five reforms to the financial system 
  7. When it comes to supervising the financial rules of the global economy, It’s Hip to Be Square 
  8. Watch This Fiscal Space  to figure out how much room to maneuver governments have when it comes to controlling debt and deficits 
  9. Financial markets and regulators need to break their Credit Rating Addiction
  10.  The global financial tornado means We’re Not in Kansas Anymore, but what will the future financial system look like?

Exploring Economic Policy Frontiers After the Crisis: 2010 IMF Research Conference


By Olivier Blanchard

The crisis has forced economists and policymakers to go back to their drawing boards. Where did they go wrong, and what implications does the crisis have for both macroeconomic theory and macroeconomic policy making?

This was the topic of this year’s IMF Jacques Polak Research Conference. The conference was the first since the passing of Jacques Polak, after whom the conference has been named, and to which he came every year until last year. Present at the Fund’s creation and a long time Fund economist, Jacques had been described by the Managing Director as “a leader of critical thought during the post-war evolution of the global economy.” As such, this conference, and its focus on the post-crisis evolution of the global economy, was fitting a fitting tribute to Jacques. We shall miss him.

Post-crisis policymaking

The twelve papers presented at the conference provided rich fodder for discussion. For two days, researchers and policymakers explored the contours of policy making in the post-crisis world. I want to share with you some of the major themes: Continue reading

Breaking the Buck—Reducing Systemic Risks Posed by Money Market Mutual Funds


By Jeanne Gobat

The breakdown of the short-term funding markets was one of the most striking features of the global financial crisis. Equally astonishing, and unexpected, was the central role that U.S. money market mutual funds played in contributing to this wholesale shut-down.

In our chapter on systemic liquidity risk in the October 2010 Global Financial Stability Report, we describe this aspect of the financial crisis and propose some concrete recommendations on how to fix it. Continue reading

Financial System Fragilities – Achilles’ Heel of Economic Recovery


By José Viñals

It would be unfair for any assessment of global economic and financial stability not to acknowledge that tremendous progress has been made in repairing and strengthening the financial system since the onset of the global crisis.

Still, the key message from the IMF’s October 2010 Global Financial Stability Report (GFSR) is clear. Progress toward global financial stability has suffered a setback over the past six months—the financial system remains the Achilles’ heel of the economic recovery. Continue reading

Just Do It—Shaping the New Financial System


By José Viñals

Fearful financial markets, an uncertain growth outlook, fiscal anxieties, long unemployment lines….no other financial crisis since the Great Depression has led to such widespread dislocation in financial markets, with such abrupt consequences for growth, trade, and employment.

The crisis exposed fundamental weaknesses in many areas of the world economy, the most obvious being dramatic deficiencies in the regulation and supervision―nationally and internationally―of financial institutions and markets.

On the bright side, the crisis has provided the impetus for a major overhaul of the financial regulatory system. So, are we making the most of this opportunity to fix the system? Continue reading

Toto, we’re not in Kansas anymore: Exploring the Contours of the Financial System After the Tornado


By Laura Kodres

Just as a tornado in Kansas transplanted Dorothy and, her dog, Toto, from familiar comforts to the unknown land of Oz, the global crisis has led many to wonder what has become of the global financial system and, more importantly, what will it look like next. Is the wicked witch of the West—excessive risk taking and leverage—really dead?

But now, as the storm subsides, there is time to speculate about what the future financial sector might look like. My IMF colleague, Aditya Narain, and I have done just that in a new Staff Position Note that attempts to discern the contours of this new financial landscape. What is clear is that the new landscape will be influenced by both the private and public sectors—their reactions to the crisis and to each other.

Continue reading

A Marriage Made in Heaven or Hell: Monetary and Financial Stability


By José Viñals

Monetary stability seems almost a given today, even taken for granted. It wasn’t always like that. Not so long ago, high and volatile inflation routinely raised its ugly head and threatened living standards. Some of us even remember those days! It wasn’t pleasant. But since then, an effective antidote has pretty much wiped out rampant price instability. Over the past three decades, better monetary frameworks have caused the level and volatility of inflation to fall sharply. These frameworks enshrined price stability as the main monetary policy objective, and provided independence and constrained discretion in the pursuit of this objective, often set out through formal inflation targets.

As I said, it worked out well. Or did it? In reality, there was a gaping hole in the system. While monetary policy frameworks fortified the castle against inflation at the front, they didn’t pay much attention to back door vulnerabilities. I’m talking about financial stability.

Continue reading

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