A few days ago I commented on Olivier Blanchard´s “guide to the conversation” that would take place at the IMF sponsored meeting. Blanchard comes back with “9 tentative conclusions” from the meeting. Just one example:
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” (the proportion or factor by which changes in government spending or taxes affect other parts of the economy). There are potentially dozens of instruments, each with their own dynamic effects that depend on the state of the economy and other policies. Bob Solow made the point that reducing discussions about fiscal policy to what is the right multiplier does not do service to the issue
It gets all very complicated. I lost count of the number of possible “targets and instruments”. The new catch word is “Macro Prudential”. A conference about “it” has already taken place in China:
Macro-prudential conference in Shanghai
Recognizing the need to reach greater understanding about the potential roads to internationally-consistent and effective macro-prudential regulation—and in an effort to make sure that an appropriately broad range of views are taken into account—earlier this week, the Peoples’ Bank of China hosted an IMF-sponsored conference in Shanghai. The conference brought together central bankers and senior financial officials from Asia and around the world to examine and discuss key issues regarding macro-prudential policies. The conference, titled Macro-Prudential Policies: Asian Perspectives, allowed international participants as well as Fund staff attendees to benefit from the views of key Asian policymakers. And vice versa.
What are the aims?
At the conference, there was wide agreement that the first step in designing macro-prudential policies ought to be a convergence of views regarding the objectives of such policies.
Of course, the most basic objective is straightforward—to prevent a crisis like the one just experienced.
This takes me back to 1997/98, when at the tail end of the Asia crisis the buzz word became “Redesigning the International Financial Architecture” (IFA), followed, obviously, by Conferences dedicated to the topic and a host of papers on the subject.
The principle is the same, only now under a different name! And don´t forget that for all the discussion on a new IFA, the Asia crisis was the seed of the so called international economic imbalances that are thought to be behind the present crisis!
But Blanchard indicates that economists should welcome all this because:
7. Where do we go from here? In terms of research, the future is exciting. There are many topics on which we should work—namely macro issues with, as Joe Stiglitz said, the right micro foundations.
I would have thought this was the perfect time to shed worries about micro foundation for macro after 40 years of taking us nowhere.