More on the IMF and fiscal policy and Blanchard's rethinking of macroeconomics

I wrote a few days ago on the IMF's persistent views on fiscal policy, and how these views are rooted in an unchanged perception of how the macroeconomy works.  The new Fiscal Monitor tends to support my previous position. The policy recommendations, in the case of advanced economies, suggest that:
"Fiscal efforts in the last five years have stabilized the average debt-to-GDP ratio. Nevertheless, it is still expected to exceed 100 percent of GDP at the end of the decade. It is important to continue to reduce debt to safer levels and rebuild fiscal buffers.
Further fiscal adjustment is needed in most advanced economies to bring down debt ratios to safer levels... reining in age-related Debt (percent of GDP) spending could reduce longer-term fiscal risks."
Why debt ratios have to fall is an incognita, given that we now know that there is no evidence for a 100 percent, or any other for that matter, threshold that leads to lower growth. And it's really annoying that they still want to cut spending on pensions, and perhaps push for privatization (even Chile's famous case now is not an example anymore). For developing economies:
"the time has come to rebuild the fiscal buffers used during the crisis, and to strengthen the institutional fiscal policy framework."
In this case, the notion is that inflation is around the corner, and, hence, that 'emerging' markets are close to full employment. In sum:
"Fiscal consolidation is called for in many economies, advanced and emerging, to reduce high public debt ratios and rebuild fiscal buffers used during the crisis."
More importantly the IMF warns that the higher rates of interest in advanced economies might lead to a crisis in the developing world. They say:
"The historical record indicates that the unwinding of monetary policy support in advanced economies can have a material impact on emerging market public debt costs and on the incidence of fiscal stress episodes."
This suggests that emerging markets have to make an additional effort to promote fiscal adjustment, since the interests costs will go up soon. I'm not only very skeptical about the idea that developing economies are close to their potential output levels, but also about the risk that interest rates will grow substantially in advanced economies. Just check the IMF growth forecasts for the developed world, and you'll see that the probability of higher rates of interest anytime soon are exaggerated.

In addition, Blanchard, the IMF counselor, has published a new paper in line with his previous effort to re-think and evaluate macroeconomics. The interesting thing is that now he suggest more openly that there is a certain consensus between Rational Expectations authors like Lucas and New Keynesians like him and say Krugman. He tells us that:
"the old fresh water/salt water distinction has become largely irrelevant... Fifty years ago, Samuelson (1955) wrote: 
'In recent years, 90 per cent of American economists have stopped being 'Keynesian economists' or 'Anti-Keynesian economists.' Instead, they have worked toward a synthesis of whatever is valuable in older economics and in modern theories of income determination. The result might be called neo-classical economics and is accepted, in its broad outlines, by all but about five per cent of extreme left-wing and right-wing writers.'
I would guess we are not yet at such a corresponding stage today. But we may be getting there."
The consensus is the New Keynesian (NK) model as represented by Clarida et al (1999) and Woodford (2003), neo-Wicksellian really, but that's another story. Funny thing though. According to him: "One striking (and unpleasant) characteristic of the basic NK model is that there is no unemployment!" He explains that this can be circumvented by assuming that:
"unemployment arises from the fact that the labor market is a decentralized market, where, at any time, some workers are looking for jobs, while some jobs are looking for workers... this implies that the wage—and by implication, the cost of labor, employment, and unemployment—depends on the nature of bargaining... It allows one to think about the effects of labor market institutions on the natural rate of unemployment."
Doesn't matter how much lipstick you put on a pig, it's still a pig. The search model proposed basically suggests that unemployment results from frictions, and it would still be true that to solve it, eliminating frictions and reducing wages would lead to the ubiquitous natural rate. Truly Gattopardo Economics, as Tom Palley has called it.

PS: The comic strip above, Mafalda, got it right back in the 1960s. Her mom asks her to pick up her knitted sweater she left on the floor, and she says that she doesn't need to obey, since in her playdate with her friends she was a president. Her mom, astutely as Mafalda perceives, tells her she is the World Bank, the Paris Club and the IMF. Even kids in the periphery know who is really in charge.


  1. "Why debt ratios have to fall is an incognita...". Quite agree. The IMF are clueless (as Bill Mitchell keeps pointing out).

    Aiming for any specific level for the debt or deficit is mad. Strikes me the objectives should be, 1, keeping employment as high as is consistent with acceptable inflation, and 2, keeping interest on the debt near zero. In fact at that zero or near zero interest rate, the debt more or less comes to the same thing as base money. So the latter two points can be re-stated: the objective should be 1, to maintain full employment, 2 to have government borrow little or nothing, and 3, as to the size of the monetary base that will simply be a number that comes out in the wash and will be dependent on the state of private sector exuberance.

    Certainly Milton Friedman advocated that latter sort of 3 point policy in a paper in 1948. See:


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