Olivier Blanchard is on leave from MIT as Economic Counsellor and Director of the Research Department of the International Monetary Fund. At a recent IMF conference he organized a discussion of macroeconomic policy. This article summarizes what he thought the participants concluded.
A few of the conclusions:
We’ve entered a brave new world in the wake of the crisis; a very different world in terms of policy making and we just have to accept it.
In the age-old discussion of the relative roles of markets and the state, the pendulum has swung—at least a bit—toward the state.
The crisis made it clear that there are many distortions relevant for macroeconomics, many more than we thought earlier.
Macroeconomic policy has many targets and many instruments.
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.” There are potentially dozens of instruments, each with their own dynamic effects that depend on the state of the economy and other policies.
We may have many policy instruments, but we are not sure how to use them.
We don’t quite know what liquidity is, so a liquidity ratio is one more step into the unknown.
If you adopt a set of financial regulations and keep them unchanged, the markets will find a way around, and ten years later, you’ll have a financial crisis.
Both self-regulation and regulationare needed, but how we combine them is extremely unclear.
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