The IMF´s ‘high-level conference’ will go nowhere

The IMF has prepared a background paper to guide discussions during a high-level conference on April 13:

The global financial crisis shook monetary policy in advanced economies out of the almost complacent routine into which it had settled since Paul Volcker’s Fed beat inflation in the United States in the early 1980s.

Our new paper, co-authored with other IMF staff, takes stock of where the debate stands, and provides a launching pad for further research and reflection. While not the first effort of its kind, this latest work shows just how much momentum the rethinking has gained, with a vast volume of new work by academics and central banks in just the last two or three years. We’ve invited policymakers, academics, and media from around the world to a high- level conference on April 13 during the Spring Meetings of the World Bank and IMF to give this broad group of stakeholders a further opportunity for discussion.


Long-term price stability has been a primary objective of monetary policy for many years, and our review found no good reason why this should change. Low and stable inflation makes it easier for households and businesses to plan, and allows the economy to operate efficiently. But the crisis has shown that this is not enough: dangerous financial imbalances can brew under the apparently tranquil surface of low and stable inflation.

It´s a pity the focus remains on long-term price stability. They see no good reason to change that even if “dangerous financial imbalances can brew under the apparently tranquil surface of low and stable inflation”.

My view is that “dangerous financial imbalances” can brew under any “surface”, be they more or less tranquil. Or didn´t the heavy handed interference of government policy in the housing market to promote homeownership (which rose from less than 64% to almost 70% between 1994 and 2006 (see chart)) had no effect on events?

IMF Conference_1

The IMF could have taken the opportunity to enlarge the ‘discussion set’, in particular expand the concept of long-term price stability to encompass long-term nominal stability.

This has been proposed by some ‘high priests’ of the profession (see here and here, for example), so it cannot be viewed as a ‘fringe movement’ spearheaded by some ‘crazy mavericks’ (here, for example).

But we have been shown by events that even nominal stability is not enough. No one can question the fact that over the past 4 years (since 2010) nominal spending growth (NGDP growth) has not been stable or that inflation has not been low. But business and households have had a hard time planning and the economy is certainly not operating efficiently.

That´s where the ‘level’ in NGDP targeting, level targeting comes in. With level targeting what you do is avoid getting stuck-in-a-slump, thus remaining depressed, as the chart illustrates. But instead of objectively discussing a change in the monetary policy framework that would be effective in getting the economy back on the right track, what we see are efforts to explain (or even justify) why being “stuck-in-a-slump“ (Secular Stagnation) is the” new normal”! Very sad.


3 thoughts on “The IMF´s ‘high-level conference’ will go nowhere

  1. When the IMF has to convene a “high-level conference” to convince the world’s major central banks to hit their inflation targets (never mind catching up to the previous NGDP path), you have to wonder if central bankers have been paying attention to the blogosphere at all the past 6 years!

  2. IMF still focus on inflation because it is what most central banks still care about. Focus on inflation has been the basis of monetary policy for the major central banks since the 1980s. The Federal Reserve is at one end where the focus is shifting towards other metrics, while the ECB remains staunchly conservative in refusing to take into consideration factors other than inflation.

    I think great example of a balanced approach is the Reserve Bank of Australia where they deflated the domestic housing bubble while keeping an eye on the inflation as a secondary consideration.

    • Jason, The US is also still locked in the inflation target straightjacket. Australia neve deflated the “bubble”. House prices today are quite a bit higher than in 2007. What Australia seems to do very well is maintain nominal stability.

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