Lunchtime Must-Read: Olivier Blanchard: Contours of Macroeconomic Policy in the Future

…April 15-16 at the IMF. Much of the discussion… has centered (rightly) on… what measures to take during a financial or sovereign crisis, what to do at the zero lower bound, how to design quantitative easing, at what rate should fiscal consolidation take place?The focus of our conference will be instead on the architecture of policy when (hopefully) policy rates have become positive again, and most countries are growing and have stabilized debt-to-GDP ratios. In other words, how will/should macro policy look once the crisis is finally over?…

Much effort has gone toward improving our understanding and assessment of systemic risk. Questions:  Where do we stand?…. And have we made enough progress in reducing systemic risk?… State-dependent regulations are the new policy kids on the block…. We are still grappling with which macroprudential tools to develop, how to use them, and the reliability of their effects….

Even before the crisis started, there were sharply different views on whether central banks should have a single mandate (price stability) or a dual mandate (price stability and stable economic activity). The crisis has… led to the suggestion that central banks should have a triple mandate, with financial stability added to the first two…. The zero (or as we are now discovering, the slightly negative) lower bound on the interest rate set by central banks was thought to be a theoretical curiosum…. If reached, central banks could, through announcements of future monetary policy, increase expected inflation and achieve large negative interest rates.  We have learned that this was simply wishful thinking….

When the financial system froze, and monetary policy no longer worked, most advanced economies relied on fiscal policy to limit the decrease in demand, and in turn on output… [with] a dramatic increase in the debt- to-GDP ratio. Since then, the focus has been on the rate at which this ratio should be first stabilized and then decreased…. If we have truly entered a period of secular stagnation, with an excess of saving leading to a negative real rate, doesn’t it make sense for governments to run larger deficits and increase public investment? Most observers agree that the fiscal stimulus early in the crisis was instrumental in limiting the decrease in output. Questions:  Doesn’t this suggest that we should take more seriously the role of fiscal policy as a macro policy tool? Most countries allow for automatic stabilizers…. Could they be improved—and why has there been so little thinking about it?…