Must-Read: Francesco Saraceno: The Blanchard Touch

Must-Read: Francesco Saraceno: The Blanchard Touch: “Yesterday I commented on… the IMF staff challeng[ing] one of the tenets of the Washington consensus…

…the link between labour market reform and economic performance. But the IMF is not new to these reassessments… has increasingly challenged the orthodoxy that still shapes European policy making… the widely discussed mea culpa in the October 2012 World Economic Outlook, when the IMF staff basically disavowed their own previous estimates of the size of multipliers, and in doing so they certified that austerity could not, and would not work… broke another taboo, i.e. the dichotomy  between  fairness and efficiency… a presentation by IMF economists showing how austerity and inequality are positively related with political instability… research linking increased inequality with the decline in unionization. Then, of course, the ‘public Investment is a free lunch’ chapter three of the World Economic Outlook, in the fall 2014.

In between, they demolished another building block of the Washington Consensus: free capital movements may sometimes be destabilizing…. The fact that research coming from the center of the empire acknowledges that the world is complex, and interactions among agents goes well beyond the working of efficient markets, is in my opinion quite something. What does this mass… of work tell us? Three things…. First, fiscal policy is back. it really is. The Washington Consensus does not exist anymore, at least in Washington…. Second… the IMF research department proves to be populated of true researchers, who continuously challenge and test their own views, and are not afraid of u-turns if their own research dictates them…. [Third] the ‘new’ IMF should learn to be cautious in its policy prescriptions…. Adopting a more prudent stance in dictating policies  would be wise…

April 22, 2015

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