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TenTakeawaysfromtheRethinkingMacroPolicy.
ProgressorConfusion?
OlivierBlanchard25May2015

On1516April2015,theIMForganisedthethirdconferenceonRethinkingMacroPolicy.Inthiscolumn,
IMFsChiefEconomistOlivierBlanchardpresentshispersonaltakeawaysfromtheconference.Though OlivierBlanchard
progressinmacropolicyisundeniable,confusionisunavoidablegiventhecomplexissuesthatremaintobe FredBergstenSeniorFellow,
settled. PetersonInstituteRobertSolow
ProfessorofEconomicsEmeritus,
MIT
33 A A
Don'tMiss
Risk,return,andskillinthe
Related
portfoliosofthewealthy
On1516April,theIMForganisedthethird
Anassessmentofthestateoftheworldeconomy Bach,Calvet,Sodini
conferenceonRethinkingMacroPolicy.Herearemy OlivierBlanchard
personaltakeaways. Transitiontoclean
Debtsupercycle,notsecularstagnation technology
KennethRogoff Acemoglu,Akcigit,Hanley,Kerr
1.Whatwillbethenewnormal?
Rethinkingmacroeconomicpolicy:Introduction
Economicsofthepopulist
OlivierBlanchard
Ihadaskedthepanelliststoconcentratenoton backlash
currentpolicychallenges,butonchallengesinthe Rodrik
newnormal.Ihadimplicitlyassumedthatthisnewnormalwouldbeverymuchliketheoldnormal, ChinasWTOentrybenefits
oneofdecentgrowthandpositiveequilibriuminterestrates.Theassumptionwaschallengedatthe USconsumers
conference. Amiti,Dai,Feenstra,Romalis

IntroducingVoxDev
Ontheonehand,KenRogoff(2015)arguedthatthatwewereintheadjustmentphaseofthedebt Editors
supercycle.Suchfinancialcycles,heargued,endupwithdebtoverhang,whichinturnslowsdown
Globalisationandexecutive
therecoveryandrequireslowinterestratesforsometimetomaintainsufficientdemand.Underthat
compensation
view,whileitmaytakeawhilefortheoverhangtogoaway,moresointheEurozonethanintheUS, Keller,Olney
weshouldeventuallyreturntosomethingliketheoldnormal.
NeweBook:Economicsand
policyintheAgeofTrump
Ontheotherhand,LarrySummersarguedthat,whiledebtoverhangwasclearlyrelevant,morewas
Bown
goingon.Heexpandedonhissecularstagnationhypothesis,arguingthat,inthecontextofa
chronicexcessofsavingoverinvestment,keepingtheeconomyatpotentialmaywellrequirevery VoxTalk:Economicsand
policyintheAgeofTrump
loworevennegativerealinterestrates.Hepointedoutthatrealinterestrateshadstarteddeclining
Bown
longbeforetheCrisis,andpointedalsotothefurtherdeclineinlongratessincehefirststatedthis
hypothesisatanIMFconferencelastyear.Ifheisright,thenewnormalwillnotbeliketheold
normal. Events
2017AnnualMeetingofthe
Myownsense,basedontheworkwehavedoneattheIMFandworkbyothers(IMF2014),isthat CentralBankResearch
debtoverhangisindeedplayingarolealthoughonewhichvariesacrosscountriesandtypeof AssociationattheBankof
Canada
debtorbutthatthedecreaseinrealrates,whichwasvisiblebeforetheCrisis,islikelytopersistin 2021July2017/Conference
thefuture.So,IamclosertoSummers(althoughIamnotsurethatwewillneednegativeratesin CenteroftheBankofCanada,
Ottawa,Canada/CEBRA&
thefuture)thantoRogoff. BankofCanada

2.Whatthenewnormalwillbemattersalotforpolicydesign WarwickSummerSchool
16July4August2017/
London/UniversityofWarwick
IfSummersisright,thishasmajorpolicyimplications.Ifequilibriumrealinterestratesreallyare incollaborationwithStMary's
goingtobenegative,thezerolowerbound(or,aswehavelearned,thenearlyzerolowerbound) University

maymakethisimpossibletoachieve.Eveniftheyarepositivebutclosetozero,andiflowinterest ShadowBanking:Financial
IntermediationbeyondBanks
ratesleadtoexcessiverisktaking,thismaycreateverytoughtradeoffsformonetarypolicy. 1415September2017/
Instead,fiscalpolicymaybeamoreappropriatetoolfordealingwiththenewnormal. Helsinki,Finland/SUERF
TheEuropeanMoneyand
Onthelatter,perhapsthemostprovocativeconclusionoftheconferencewasofferedbyBrad FinanceForumandBankof
Finland
DeLong.Iftherateatwhichthegovernmentcanborrow(r)islessthanthegrowthrate(g),then,he
CorporateFinanceTheory
argued,governmentsshouldincrease,notdecrease,currentdebtlevels.Ifpeoplevaluesafetyso Symposium

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much(andthusthesaferateissolow),thenitmakessenseforthestatetoissuesafedebt,and 15September16January
2017/Cambridge/Cambridge
possiblyuseitforproductiveinvestment.Andiftheinterestrateislessthanthegrowthrate,debtis JudgeBusinessSchool
safe.ThedebttoGDPratiowilldecrease,evenifthegovernmentneverrepaysthedebt.
IMFEighteenthJacques
PolakAnnualResearch
Onesensesthattheargumenthasstronglimits,fromthelikelihoodthatrremainslessthang(the Conference:TheGlobal
twolettersappeartohavebecomepartofthegeneralvocabulary),totheissueofwhatdetermines FinancialCycle
23November2017/
thedemandforsafeassets,towhetherrlessthangisanindicationofdynamicinefficiencyorsome WashingtonDC,USA/
distortion,towhether,eveninthisworld,highlevelsofdebtincreasetheprobabilityofmultiple InternationalMonetaryFund
equilibria,rollovercrisesandsuddenstops.
CEPRPolicyResearch
3.Canwehopetolimitsystemicfinancialrisk?
DiscussionPapers Insights
Themainunderlyingthemeinthediscussionoffinancialregulationwaswhetherithadsuccessfully
Homeownershipof
reducedfinancialrisk.Therewasagreementonreduced,notsoonsuccessfully.Thereislittle immigrantsinFrance:
questionthatnewregulations,fromBaselIIItoDoddFrank,havereducedriskinbanking.Butsome selectioneffectsrelatedto
internationalmigrationflows
panellists,inparticularAnatAdmati,arguedthatthiswasfarfromenough,whileothersarguedthat Gobillon,Solignac
theriskhadbeenlargelyshiftedtotheshadowbankingsystem.
ClimateChangeandLong
RunDiscountRates:
Thediscussionbecamegranular.Theconstructionofrealtimesystemicriskmeasuresformajor EvidencefromRealEstate
banksbytheVlabatNYU,presentedbyViralAcharya,showshowmuchprogresshasbeenmade Giglio,Maggiori,Stroebel,
Weber
indefiningandmeasuringsystemicrisk,atleastinthebankingsystem.RobertRubinandPhilipp
Hildenbrandemphasisedtheheterogeneityofwhatismeantbyshadowbanking,andsuggestedan ThePermanentEffectsof
FiscalConsolidations
approachtoregulationoftheshadowbankingsystem,focusedonfunctionsoractivitiesratherthan Summers,Fats
entities.Inanutshell,ifitinvolvesmaturitytransformation,liquiditymismatch,andleverage,thenit
Demographicsandthe
isbankingandneedstoberegulated. SecularStagnation
HypothesisinEurope
Yet,anotherthemewastheunintendedeffectsofregulation.Acharyaarguedthatincorrect Favero,Galasso
regulatoryriskweightshadledtosystemicriskremainingtoohighintheEuropeanbankingsystem. QEandtheBankLending
RubinandJaimeCaruanadiscussedtheeffectsofregulationonthereducedroleoftraditional ChannelintheUnited
Kingdom
marketmakers,andtheresultingdecreaseinmarketliquidity. Butt,Churm,McMahon,
Morotz,Schanz
4.Shouldmonetarypolicygobacktoitsoldways?
Subscribe
BeforetheCrisis,mostadvancedcountrycentralbankshadconvergedtoalargelycommon
framework.Somehadonlyonemandatetokeepinflationlowandstableothershadadual @VoxEU
mandatetoalsokeeptheeconomyoperatingatpotential.Themaininstrumentwasapolicyrate,
anchoringthetermstructureofinterestrates. RSSFeeds

Shouldthisframeworkbemaintained?BenBernankesanswerwaslargelyyes.Onceeconomies WeeklyDigest
wereoutofthezerolowerbound,mostoftheprogrammesintroducedduringtheCrisisshouldbe
putbackontheshelf,readytobeusedonlyiftherewasanothersufficientlyadverseshock.The
maininstrumentofmonetarypolicyshouldagainbethefederalfunds,or,ifthecentralbankwanted
tomaintainalargerbalancesheetandinducebankstoholdexcessreserves,acombinationofthe
federalfundsrate,areporate,andtherateonexcessreserves.

Bernanke,however,raisedtheissueofcompositionandsizeofthebalancesheetofthecentral
bankinthenewnormal,andtheissuewastakenonbyothers,inparticularRicardoCaballero.With
respecttocomposition,if,assomeargue,thereisasafeassetshortage,doesitmakesensefor
centralbankstohold,astheydid,alargeamountofthosesafeassets?Wouldntitbebetterforthe
centralbanktoholdotherassets,andleavethosesafeassetsinprivatesectorhands?

Withrespecttosize,ifthecentralbanksareinauniquepositiontobeabletosupplysafeassets,
shouldnttheydoit?Iseethisdiscussionashavingjuststarted,raisingdeepissuesaboutthe
privatedemandforsafeassets,andthepotentialroleofcentralbankinthiscontext,bothin
advancedeconomiesandemergingmarkets.

Onequestioninthiscontextiswhatisbehindthedemandforsafeassets.Caballeroremarkedthat
ifthedemandforsafeassetsisademandforhedgesagainstmacroeconomicfluctuations,long
bondsmayactuallybesaferthanshortbondsorcash.Theyaremorelikelytogoupinpricewhen
timesarebad(andthecentralbankdecreasesinterestrates),thusprovidingabetterhedgeagainst
macroeconomicfluctuations.Butifthedemandisinsteadforassetswithknowncollateralvalue,
investorswillwantshortbonds.Inthefirstcase,thecentralbankshouldholdshortbondsandleave
thelongbondsinprivatehands(theoldnormal)inthesecond,theconclusionisthereverse.

5.Instrumentrules
ThesessionledtoanexchangebetweenBernankeandJohnTaylorontheroleofinstrument
rules.TaylorarguedthatadeviationbytheFedfromarulesbasedpolicy(toolooseamonetary
policyintheyearsprecedingtheCrisis),alongwitharegulatoryprocesswhichbrokerulesfor
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safetyandsoundness,wasakeyfactorintheGlobalCrisis.Hearguedforaquickreturntoarules
basedpolicyfortheinstruments,whathecalledrenormalisingmonetarypolicy.Bernanke
disagreedandansweredthat,inthecomplexworldinwhichwelive,therightrulewouldbevery
complex,andkeepingrigidlytoasimplerulewouldbecounterproductive.Judgingthecentralbank
onhowitfulfilsitsmandateratherthanrequiringittofollowasimplerule,heargued,isthewayto
proceed.Iagreewithhim.

6.Macroprudentialtoolsorfinancialregulation
Thesemanticissueofwhatismeantbymacroprudentialtoolscameup,andPaulTucker
suggestedthefollowingdefinition:Thechoiceofdynamicallyadjustingregulatoryparameterssoas
tomaintainsystemicresilience.Thedefinitionisheavy,buthelpful.Iindeedseethemain
differencebetweenmacroprudentialtoolsandfinancialregulationasthefactthatthefirstare
dynamicallyadjustedandthesecondisnot.

Theissueofwhenoneshouldgofordynamicallyadjustedtools,orsimplyfortougherfinancial
regulation(say,goforvariablecapitalratiosor,instead,forhigherbutconstantcapitalratios),which
Iseeascentral,wasnotdiscussedinthisform.Tucker,however,arguedfortheuseofmacro
prudentialtoolstodealwithexuberance,notnecessarilyforfinetuninginmorenormaltimes.
Rubinremarkedthatwewerenotverygoodattellingwhentimeswereexuberantratherthan
normal.

Alsodiscussedwastheissueoftherelativerolesofmonetarypolicyandmacroprudentialtools.
Fromamacroviewpoint,Shinargued,onecouldthinkofbothasaffectingthedemandandthe
supplyofcredit.Fromafinancialviewpoint,onecouldthinkofmonetarypolicyasageneral
instrument,andmacroprudentialasspecificinstruments.Duringthediscussion,LarsSvensson
(2015)arguedthatasimplecostbenefitanalysissuggeststhatmonetarypolicyisaverypoor
instrumenttodealwithfinancialrisk.InacostbenefitanalysisoftheSwedishcasethatuses
Riksbankestimates,theunemploymentcostofincreasingtheinterestratefarexceedsthebenefits
ofapotentiallybetterfuturemacrooutcomefromapotentialreductionintheprobabilityandseverity
ofaGlobalCrisis.Ifoundhisargumentsconvincing.

7.Shouldcentralbankskeeptheirindependence?
Throughouttheconference,e.g.,inGillMarcustalk,andactuallythroughoutthevariousmeetings
whichtookplaceinthefollowingdays,policymakersremarkedandcomplainedabouttheheavy
burdenplacedonmonetarypolicyinthisCrisis,andthedangerofapoliticalbacklashagainst
centralbanks.EvenastheCrisisrecedes,itisclearthatcentralbankswillendupwithsubstantially
moreresponsibilitieswhethertheyaregiveninfullorsharedforfinancialregulation,financial
supervision,andtheuseofmacroprudentialtools.Whileeventheuseofthepolicyratehas
distributionalimplications,theseimplicationsaremuchmoresalientinthecaseofregulationor
macroprudentialtools,suchastheloantovalueratio.Thegeneralconsensuswasthatthese
distributionalimplicationscouldnotbeignored,andthatwhilecentralbanksshouldretainfull
independencewithrespecttotraditionalmonetarypolicy,thiscannotbethecaseforregulationor
macroprudentialtools.

8.Littleprogressonthedesignoffiscalpolicy
Thetraditionalobjectiontousingfiscalpolicyasamacroeconomicpolicytoolwasthatrecessions
didnotlastlong,andbythetimediscretionaryfiscalmeasureswereimplemented,itwastypically
toolate.MartinFeldsteinmadethepointthatsomerecessions,inparticularthoseassociatedwith
financialcrises,arelongenoughthatdiscretionarypolicycanandshouldbeused.Henoted,
however,thatfiscalactivismneednotmeanchangesintheoverallbudgetdeficitorsurplus,but
maycomefromchangesinthecompositionofthebudget,forexample,anincreaseinthe
investmenttaxcreditfinancedbyanincreaseincorporatetaxation.

Interestingly,despitequestionsbythechairofthesession,VitorGaspar,onpotentialimprovements
inthedesignofautomaticstabilisers(basedontheveryinterestingchapter2oftheApril2015
IMFsFiscalMonitor),theissuedidnotregister,andIamstillstruckbythelackofactiononthis
front.Thelikelyreasonisthat,forthetimebeing,thefocusonmostgovernmentsisondebt
reduction,ontherightspeedoffiscalconsolidation.Eventhere,however,therehasbeenlittlework,
andevenlessactiononthedesignoffiscalrules.Inthatrespect,aninterestingremarkbyMarco
ButiwasthattheexcessivenumberandcomplexityoftheEUrulesreflectsinparttherelative
weaknessoftheEuropeanCommissioninmakingsurecountriesactuallyimplementthem.

9.Thecomplexeffectsofcapitalflows

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Whatstruckmemostinthediscussionofcapitalflowswastherecognitionthattheyhavecomplex
effects,athemewhichresonatedwiththerecentMundellFleminglecturebyHeleneRey.
Globalisationandtheincreaseincountriesgrossassetandliabilitypositions,implythatshiftsin
flowscanbeverylarge.Asallthreespeakersinthesession,AgustnCarstens,MauryObstfeld,
LuizPereiradaSilvaaswellasRaghuramRajaninthefinalpaneldiscussionargued,the
effectsoftheseshiftsgofarbeyondchangesinexchangerates.Theyaffectthedomesticfinancial
system,sometimesforthebetter,sometimesfortheworse.

Thisconclusionhasoneclearimplication,namelythathandsoffpoliciesarenotthesolution.Isee
thisasoneareawheretherethinkinghasbeenstriking,saycomparedtotenyearsago.Therewas
wideagreementthatmacroprudentialtoolscandecreasetheadverseeffectsonthebanking
system.TherewasalsoagreementthatFXinterventioncanbeausefultool,atleasttostabilisethe
exchangerate.PereiradaSilvaarguedforapragmaticapproachinBrazilcentredonthese.But
therewasnoagreementoncapitalcontrols.Carstenswasagainst,arguingthat,atleastforMexico,
whichishighlyintegratedwiththeUS,capitalcontrolshavemorecoststhanbenefitsandshouldbe
avoided.Tome,capitalcontrolsarenotfundamentallydifferentfrommacroprudentialtoolsthe
rulesforinvestorshavetobeclear,bothexanteandexpost.

10.Howmuchcantheinternationalmonetarysystembeimproved?
Turningtothedesignoftheinternationalmonetarysystem,RicardoCaballerotoucheduponthe
demandforsafeassetsbyemergingmarketcountries,andarguedforabetterprovisionof
internationalliquiditybytheIMFandbycentralbanks.Notonlywouldthisbedesirableonitsown,
but,relatingittotheearlierdiscussion,itwouldalsoleadtoanincreaseintheworldsaferealrate,
andalleviatetheworriesaboutsecularstagnation.MauryObstfeldarguedthatnoexchangerate
arrangementwasperfect,butthatmanagedfloatwasstillprobablythebestarrangementformost
countries.Twoothermainissuescameup.

Thefirstwashowtosquarethenationalmandateofcentralbankswiththefactthatmonetary
policiescanhavelargespillovereffectsonothercountries,potentiallyleadingtoabadglobal
outcome.JaimeCaruanaarguedforenlightenedselfinterest,basedonthenotionthatoriginating
countriesshould,intheirowninterest,takeintoaccountthespillbacksoftheirpolicies.Thisself
interestargument,however,onlygoessofar.Spillbacksmaybelimited,andtakingtheminto
accountmaystillnotinducebehaviourconsistentwiththebestglobaloutcome.

Thesecondissuewascloselyrelated,andhadtodowiththeexactnatureofthespillovers.Putina
moreformalway,istheNashequilibriumtheequilibriumwhichariseswheneachcentralbank
triestofulfilitsnationalmandategivenothercentralbanksactionssuboptimalrelativetoa
cooperativeequilibrium.ZetiAkhtarAzizarguedthatthesespilloverswerepoorlyunderstood.
Betterunderstanding,sheargued,couldleadtolessdisagreementsandfrictionsamongadvanced
economiesandemergingmarkets.

Thebottomline
NotallthequestionsIhadraisedinmypreconferenceblogweretakenup,andfewweresettled
(Blanchard2015a).Still,togobacktothetitleoftheconference,RethinkingMacroPolicyIII.
ProgressorConfusion?,myanswerisdefinitelyboth.Progressisundeniable.Confusionis
unavoidable,giventhecomplexissuesthatremaintobesettled.(Myownintervention,onthis
theme,isavailableinBlanchard2015b).

References
Blanchard(2015a),ContoursofMacroeconomicPolicyintheFuture,iMFdirect.imf.org,2April.

Blanchard(2015b),Rethinkingmacroeconomicpolicy:Introduction,VoxEU.org,20April.

IMF(2014),WorldEconomicOutlook:RecoveryStrengthens,RemainsUneven,Chapter3,
PerspectivesonGlobalInterestRates,April.

IMF(2015),NowistheTime:FiscalPoliciesforSustainableGrowth,FiscalMonitor,IMF,April.

Rogoff,K(2015),Debtsupercycle,notsecularstagnation,VoxEU.org,22April.

Svensson,L(2015),Inflationtargetingandleaningagainstthewind,forthcominginSouthAfrican
ReserveBank,FourteenYearsofInflationTargetinginSouthAfricaandtheChallengeofa
ChangingMandate:SouthAfricanReserveBankConferenceProceedings2014,Pretoria:South
AfricanReserveBank.

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33 A A
Topics:GlobalcrisisMacroeconomicpolicyMonetarypolicy

Tags:IMFconference,macropolicy,theworldeconomy

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