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Progress and Confusion

Progress and Confusion: The State of Macroeconomic Policy

Olivier J. Blanchard
Raghuram G. Rajan
Kenneth S. Rogoff
Lawrence H. Summers
Copyright Date: 2016
Published by: MIT Press
Pages: 312
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  • Book Info
    Progress and Confusion
    Book Description:

    What will economic policy look like once the global financial crisis is finally over? Will it resume the pre-crisis consensus, or will it be forced to contend with a post-crisis "new normal"? Have we made progress in addressing these issues, or does confusion remain? In April of 2015, the International Monetary Fund gathered leading economists, both academics and policymakers, to address the shape of future macroeconomic policy. This book is the result, with prominent figures -- including Ben Bernanke, Lawrence Summers, and Paul Volcker -- offering essays that address topics that range from the measurement of systemic risk to foreign exchange intervention. The chapters address whether we have entered a "new normal" of low growth, negative real rates, and deflationary pressures, with contributors taking opposing views; whether new financial regulation has stemmed systemic risk; the effectiveness of macro prudential tools; monetary policy, the choice of inflation targets, and the responsibilities of central banks; fiscal policy, stimulus, and debt stabilization; the volatility of capital flows; and the international monetary and financial system, including the role of international policy coordination. In light of these discussions, is there progress or confusion regarding the future of macroeconomic policy? In the final chapter, volume editor Olivier Blanchard answers: both. Many lessons have been learned; but, as the chapters of the book reveal, there is no clear agreement on several key issues.ContributorsViral V. Acharya, Anat R. Admati, Zeti Akhtar Aziz, Ben Bernanke, Olivier Blanchard, Marco Buti, Ricardo J. Caballero, Agustín Carstens, Jaime Caruana, J. Bradford DeLong, Martin Feldstein, Vitor Gaspar, John Geanakoplos, Philipp Hildebrand, Gill Marcus, Maurice Obstfeld, Luiz Awazu Pereira da Silva, Rafael Portillo, Raghuram Rajan, Kenneth Rogoff, Robert E. Rubin, Lawrence H. Summers, Hyun Song Shin, Lars E. O. Svensson, John B. Taylor, Paul Tucker, José Viñals, Paul A. Volcker

    eISBN: 978-0-262-33345-0
    Subjects: Economics, Political Science
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Table of Contents

Export Selected Citations
  1. Front Matter (pp. i-iv)
  2. Table of Contents (pp. v-viii)
  3. 1 A Road Map to “Progress and Confusion” (pp. 1-16)
    Olivier Blanchard and Rafael Portillo

    On April 15–16, 2015, the IMF organized the third “Rethinking Macro Policy” conference. Held every two years since 2011, these conferences have brought together academics and policymakers to assess how the global financial crisis and its aftermath should change our views of macroeconomic policy. This time around, the focus was on the contours of policy in the future, once the global financial crisis is finally over. Will the macro framework look like the precrisis consensus, or will it be different? Have we made progress on this question, or does confusion remain?

    The twenty-seven chapters in this book reflect the...

  4. The “New Normal”
    • 2 Debt Supercycle, Not Secular Stagnation (pp. 19-28)
      Kenneth Rogoff

      I want to address a narrow yet fundamental question for understanding the current challenges facing the global economy: Has the world sunk into “secular stagnation,” with a long future of much lower per capita income growth driven significantly by a chronic deficiency in global demand? Or does weak postcrisis growth reflect the post-financial-crisis phase of a debt supercycle where, after deleveraging and borrowing headwinds subside, expected growth trends might prove higher than simple extrapolations of recent performance might suggest?¹

      In this chapter I argue that the financial crisis/debt supercycle view provides a much more accurate and useful framework for understanding...

    • 3 Rethinking Secular Stagnation after Seventeen Months (pp. 29-38)
      Lawrence H. Summers

      I salute Olivier Blanchard and the IMF for so open a dialogue at the conference on so wide a range of macroeconomic hypotheses. What I want to do in this chapter is talk about three things: I want to express why I think that the risk of secular stagnation is an important problem throughout the developed world. I want to contrast the secular stagnation viewpoint with two views that I regard as heavily overlapping—the debt supercycle view that Ken Rogoff has put forward and the savings glut view that Ben Bernanke has put forward—and explain why I think...

  5. Systemic Risk and Financial Regulation
    • 4 A Note from the Session on Systemic Risk and Financial Regulation (pp. 41-42)
      Paul A. Volcker

      Three participants—two distinguished academics and a prominent ex-central banker and financial executive—presented overlapping analyses of the challenge for “macroprudential” supervision.

      Several themes stood out. One was common and not unexpected: the fundamental importance of strong capital requirements for commercial banks, and more generally, concerns about excessive leverage throughout the financial system.

      Within that context, however, substantial differences in analysis were evident. One was concern about the potential weakness of relying on “risk-based” measures of capital, given the difficulty of identifying the sources of risk, current and potential. The usefulness of contingent capital instruments (i.e., those characterized by mandatory...

    • 5 A Comparative Analysis of Financial Sector Health in the United States, Europe, and Asia (pp. 43-60)
      Viral V. Acharya

      This chapter uses recent methodology for estimating capital shortfalls of financial institutions during aggregated stress to assess the evolution of financial sector health since 2007 in the United States, Europe, and Asia. Financial sector capital shortfalls reached a peak at the end of 2008 and in early 2009 for the United States and Europe; however, they declined thereafter steadily only for the United States, with Europe reaching a similar peak in the fall of 2011 during the southern periphery sovereign crises. In contrast, the financial sector in Asia had little capital shortfall in 2008–2009, but the shortfall has increased...

    • 6 Rethinking Financial Regulation: How Confusion Has Prevented Progress (pp. 61-72)
      Anat R. Admati

      The failure of financial regulation can, and did, cause significant harm to the economy. I argue that confusion about the nature of the problems in the financial system and about the trade-offs associated with key regulations has prevented progress in making the financial system safer and healthier. This system, little changed since the financial crisis, still endangers and distorts the economy unnecessarily.

      In 2007–2009, a crisis that started in the US housing market had powerful ripple effects around the globe. These effects were largely the result of an increase in opacity and interconnectedness, which created powerful contagion mechanisms, transmitting...

    • 7 Systemic Risk and Financial Regulation: Where Do We Stand? (pp. 73-80)
      Philipp Hildebrand

      The Basel III/Financial Stability Board agenda has clearly helped bring about a global banking system that is much more resilient to insolvency and liquidity risks. If we consider both quantity and quality, capital buffers in the world’s most significant banks today are at least six times higher than before the crisis; living wills and “bail-inable” capital should help further to contain the too-big-to-fail problem; and key supervisors everywhere are showing proactiveness with stress tests, which is key to having a dynamic view of risks. Equally important, investors are continuing to push for further changes and risk reduction in the business...

    • 8 Shadow Banking as a Source of Systemic Risk (pp. 81-86)
      Robert E. Rubin

      My colleagues on the panel are highly respected and deeply experienced experts on central bank issues. In this chapter I express my views as a practitioner, and those views are based on my experience at Goldman Sachs, where I had responsibility for some, and then all, of the firm’s trading and arbitrage activities; my years in the Clinton administration; and my present activity advising several investment organizations and as a continuing participant in the national policy dialogue. I will focus on three issues: the possibility of market excesses, the likelihood of future market and financial destabilization, and systemic risk in...

  6. Macroprudential Policies:: Gathering Evidence
    • 9 Macroprudential Policy Regimes: Definition and Institutional Implications (pp. 89-98)
      Paul Tucker

      Policymakers and economists spent decades debating the design of monetary institutions before the wave of central bank independence measures in the 1990s. We now need to turn our eyes to a fresh institution-building challenge: macroprudential regimes. Even for skeptics, this is an important endeavor as, wisely or unwisely, these regimes are increasingly springing up around the world.

      There is not yet agreement, however, on the meaning of “macroprudential.” Too often the term is used as a synonym for financial stability policy more generally; we don’t need two words for one thing. It is important that the IMF, the Bank for...

    • 10 Macroprudential Tools, Their Limits, and Their Connection with Monetary Policy (pp. 99-106)
      Shin Hyun Song

      In keeping with the title of the session, “Macroprudential Policies: Gathering Evidence,” I will say something about the evidence, but I will also offer some broader reflections on the limits of macroprudential tools and their relationship with monetary policy.

      A key aim of macroprudential policy is to moderate the procyclicality of the financial system. It does so by influencing the financial intermediation process; it operates on the assets, liabilities, and leverage of intermediaries (figure 10.1). In this respect, macroprudential policy and monetary policy share some similarities.

      For instance, both policies affect thedemand for creditby reallocating spending over time,...

    • 11 A Simple Cost-Benefit Analysis of Using Monetary Policy for Financial Stability Purposes (pp. 107-118)
      Lars E. O. Svensson

      Should monetary policy be used for financial stability purposes? Should monetary policy, as suggested by the Bank for International Settlements (2014), “lean against the wind”—for instance, against increases in housing prices and household debt—in an attempt to promote financial stability?

      Jeremy Stein (2013) has put forward what is arguably the strongest argument in favor of leaning against the wind for financial stability purposes: “While monetary policy may not be quite the right tool for the job, it has one important advantage relative to supervision and regulation—namely that it gets in all of the cracks [of the financial...

  7. Monetary Policy in the Future
    • 12 Introduction to the Monetary Policy Section (pp. 121-128)
      José Viñals

      One of the most remarkable features of the last seven years, since the beginning of the global financial crisis, has been the tremendous innovation and experimentation in the field of monetary policy. Pressed by circumstances, central bankers had to take bold and unprecedented actions. Some, of course, continue to do so.

      With the passage of time, the question is how this experience has modified our view about the way monetary policy should be conducted in the future, once the crisis is behind us.

      These introductory remarks focus on five areas where this question applies very starkly. First, should monetary policy...

    • 13 Monetary Policy in the Future (pp. 129-134)
      Ben Bernanke

      In the few minutes that I have, I’ll offer some thoughts on the Fed’s monetary policy framework, its tools for implementing monetary policy, and how both are likely to evolve as we return to a more historically normal economic and policy environment.

      In January 2012 the Federal Open Market Committee (FOMC) issued for the first time a formal description of its policy framework, which has been reapproved each January since then.¹ The framework document emphasizes the FOMC’s commitment to a balanced approach in the pursuit of the Fed’s two statutory objectives, price stability and maximum employment. The FOMC has given...

    • 14 A Monetary Policy for the Future (pp. 135-142)
      John B. Taylor

      A year ago at another IMF conference, “Monetary Policy in the New Normal,” I argued that central banks should renormalize monetary policy, not new-normalize it to some new normal as some had suggested.¹ I want now to elaborate on that theme, outline an implied monetary policy for the future, and consider some objections that have been raised.

      Let me begin with a mini-history of monetary policy in the United States during the past fifty years. When I first started doing monetary economics in the late 1960s and 1970s, monetary policy was highly discretionary and interventionist. It went from boom to...

    • 15 The Credit Surface and Monetary Policy (pp. 143-154)
      John Geanakoplos

      I believe that credit plays a central role in the booms and busts of market economies, and even in milder fluctuations. But I do not believe that the credit conditions influencing booms and busts are driven primarily by fluctuations in riskless interest rates, or by the wrong riskless interest rates. When bankers say credit is tight, they do not simply mean that riskless interest rates are so high they are choking off demand for loans. They mean that many businesses and households that would like to borrow at the current riskless interest rates cannot get a loan. They are referring...

    • 16 Remarks on the Future of Monetary Policy (pp. 155-162)
      Gill Marcus

      During the precrisis period, monetary policy appeared to be relatively predictable and straightforward. The Great Moderation saw low inflation rates around the world, with inflation targeting, either formal or informal, prevailing as the dominant framework. Interest rate policy was focused on maintaining price stability, central banks generally had almost undisputed independence in this regard, and emerging risks to financial stability from low interest rates were not generally regarded as a concern for monetary policy. In the words of Mervyn King, monetary policy had in fact reached its objective, with its indicator of success being “boring.” However, since the onset of...

  8. Fiscal Policy in the Future
    • 17 Fiscal Policy for the Twenty-First Century: Testing the Limits of the Tax State? (pp. 165-176)
      Vitor Gaspar

      Public finance and fiscal policy are in search of a new paradigm. Richard Musgrave’s threefold classification of public finance functions—allocation, distribution, and stabilization—is showing signs of wear and tear, after a half century. Similarly, the later paradigm whereby government intervention is justified on the basis of market failure is also showing signs of fatigue. Assumptions necessary for market efficiency are unlikely to hold in the real world. We now know that market failure is pervasive and so does not provide much clarity about when governments should or should not intervene. Clearly, full symmetric information, complete markets, an absence...

    • 18 The Future of Fiscal Policy (pp. 177-182)
      Martin Feldstein

      There are of course many important issues about the future of fiscal policy, especially long-term issues about the size of the national debt and the structure of taxes. But, leaving broader issues to other times and places, I am going to focus on the following question: At the zero lower bound, can fiscal policy be more effective than monetary policy in stimulating investment without the potential risks associated with quantitative easing (QE)?

      I think it is useful to separate the question into two parts:

      First, can fiscal policy be more effective than monetary policy in stimulating investment?

      Second, can fiscal...

    • 19 What Future for Rules-Based Fiscal Policy? (pp. 183-196)
      Marco Buti

      In this chapter, I wish to address the issue of rules-based fiscal policy. Specifically, the question I wish to put forward is, what is the future of rules-based fiscal policy?

      Fiscal rules are now widespread, in both advanced and emerging economies (EMEs), which is a testament to their increasing popularity. Yet, as before in the monetary field, the growing experience with rules-based fiscal policy has illuminated potential pitfalls. And there has always been a view that rules are at best an “unnecessary ornament,” if not positively harmful.

      The reflection has been continually active with regard to the European set of...

    • 20 On the Proper Size of the Public Sector and the Level of Public Debt in the Twenty-First Century (pp. 197-210)
      J. Bradford DeLong

      Olivier Blanchard, when he parachuted me into the panel, asked me to “be provocative.”

      So let me provoke:

      My assigned focus on “fiscal policy in the medium term” has implications. It requires me to assume that things are or will be true that are not now or may not be true in the future, at least not for the rest of this decade and into the next. It makes sense to distinguish the medium from the short term only if the North Atlantic economies will relatively soon enter a regime in which the economy is not at the zero lower...

  9. Capital Flows, Exchange Rate Management, and Capital Controls
    • 21 Floating Exchange Rates, Self-Oriented Policies, and Limits to Economic Integration (pp. 213-218)
      Maurice Obstfeld

      I will frame my discussion by asking a time-honored question: Are floating exchange rates working? My answer is a qualified yes.

      Over the past twenty years, many emerging market economies (EMEs) moved to more flexible exchange rate regimes. These have been widely credited with helping them navigate the 2008–2009 crisis. But the system comes under stress when exchange rates move sharply, especially in a context, such as the period since the summer, when projected turning points in monetary policy and growth drive sudden large exchange-rate readjustments. Those movements are driven by portfolio shifts in international financial markets that have...

    • 22 Some Lessons of the Global Financial Crisis from an EME and a Brazilian Perspective (pp. 219-232)
      Luiz Awazu Pereira da Silva

      I would like to give an emerging market economy (EME) perspective for this session on capital flows, exchange rate management, and capital controls, or, to use current terminology, capital flow management.¹ I don’t want to oversimplify, but let me suggest that, for many of us, the global financial crisis incited feelings of déjà vu: what was happening with the advanced economies was very much what we had experienced and learned about large debt-financial crises, putting aside size and scope.

      From this angle, I see some progress in many ways. The global financial crisis had a lax regulatory component at its...

    • 23 Capital Inflows, Exchange Rate Management, and Capital Controls (pp. 233-242)
      Agustín Carstens

      A discussion of the interaction between capital inflows, exchange rate management, and capital controls is quite timely. However, it is by no means a new discussion. The interactions between and among these three items have been extensively analyzed, in particular at the IMF. What makes such interactions a recurrent topic of discussion is that the prevailing situation and perspectives in the global economy and financial markets at different times might modify how countries should adjust their exchange rate management and their position with regard to the use of capital controls in the face of the capital inflows or outflows they...

  10. The International Monetary and Financial System
    • 24 The International Monetary and Financial System: Eliminating the Blind Spot (pp. 245-254)
      Jaime Caruana

      The design of international arrangements suitable for the global economy is a long-standing issue in economics. The global financial crisis has put this issue back on the policy agenda.

      I would like to concentrate on an important blind spot in the system. The current international monetary and financial system (IMFS) consists of domestically focused policies in a world of global firms, currencies, and capital flows—but are local rules adequate for a global game? I argue that liquidity conditions often spill over across borders and can amplify domestic imbalances to the point of instability. In other words, today’s IMFS not...

    • 25 Prospects and Challenges for Financial and Macroeconomic Policy Coordination (pp. 255-260)
      Zeti Akhtar Aziz

      The challenges of operating in the context of the existing international monetary and financial system are clear. The world is frequently characterized by conditions of disequilibrium, financial imbalances, and at times dysfunctional markets. This chapter touches on the progress, challenges, and prospects for financial and macroeconomic policy coordination in a world that is more interconnected and interdependent than ever, with special emphasis on the perspective of the emerging market economies (EMEs).

      There are several compelling reasons to advance a greater role for international cooperation and coordination: growing international inter-connectivity, significant cross-border policy spillovers, and finally the immense potential benefits that...

    • 26 Global Safe Asset Shortage: The Role of Central Banks (pp. 261-266)
      Ricardo J. Caballero

      My assignment is to talk primarily about international liquidity provision and interlinkages of central banks’ policies … I know what I’m expected to say about these topics, and I know that most attendees and readers also know what I’m supposed to say. So we might as well skip all that and talk about something else … although, as you will see, there are some points of contact between this something else and my mandate, but it will take a little while to get there.

      I will focus on a central imbalance in global financial markets that has key implications for...

    • 27 Going Bust for Growth (pp. 267-284)
      Raghuram Rajan

      There are few areas of robust growth around the world, with the IMF repeatedly reducing its growth forecasts in recent quarters. This period of slow growth is particularly dangerous because both industrial countries and emerging market economies (EMEs) need high growth to quell rising domestic political tensions. Policies that attempt to divert growth from others rather than create new growth are more likely under these circumstances. Even as we create conditions for sustainable growth, we need new rules of the game, enforced impartially by multilateral organizations, to ensure that countries adhere to international responsibilities.

      Why is the world finding it...

  11. Conclusion
    • 28 Rethinking Macro Policy: Progress or Confusion? (pp. 287-290)
      Olivier Blanchard

      On April 15 and 16, 2015, the IMF hosted the third conference on “Rethinking Macroeconomic Policy.” I had initially chosen as the title and subtitle “Rethinking Macroeconomic Policy III. Down in the Trenches.” I thought of the first conference in 2011 as having identified the main failings of previous policies, the second conference in 2013 as having identified general directions, and this conference as a progress report.

      My subtitle was rejected by one of the co-organizers, Larry Summers. He argued that I was far too optimistic, that we were nowhere close to knowing where were going. Arguing with Larry is...

  12. List of Contributors (pp. 291-294)
  13. Index (pp. 295-304)