Wednesday, April 22, 2015

Blanchard on rethinking macroeconomic policy

Here is Blanchard's summary of the last conference. Nothing much happening in all fairness, and certainly little impact on the policy advice that the IMF provides. On regulation, perhaps higher reserves is Blanchard's solution, and on monetary policy a higher target (which he does not discuss this time) and perhaps a defense of QE. But he only asks whether "the Fed [should] return to intervening only at the short end of the yield curve, or are there good reasons for continuing to intervene along the curve?" No mention that intervening at the long end provides space for expansionary fiscal policy by reducing interest rates (the real reason for QE).

On fiscal policy the same. There is an admission that, contrary to Reinhart and Rogoff, there is no threshold above which debt-to-GDP hurts economic growth. The discussion of the debt-to-GDP ratio has vanished from the last WEO (Apr. 2015). This is good, since in the previous one (Oct., 2014) the IMF still argued that: "many advanced economies have little fiscal space available given still-high debt-to-GDP ratios and the need for further consolidation." Blanchard repeats the language of the last WEO. He says:
"But how to assess what the right goal is for each country? This remains to be done. It has become clear that there is no magic debt-to-GDP number. Depending on the distribution of future growth rates and interest rates, on the extent of implicit and explicit contingent liabilities, one country’s high debt may well be sustainable, while another's low debt may not. Conceptually and analytically, the right tool is a stochastic debt sustainability analysis (something we already use at the IMF when designing programmes). The task of translating this into simple, understandable goals remains to be done."
Interestingly, the policy advice remains the same. For example, on Japan the last WEO says that: "risks to public debt sustainability remain a key concern given high public debt ratios, and a credible medium-term strategy for fiscal adjustment with specific measures is urgently needed to maintain market confidence." And for the US: "the priority remains to agree on a credible medium-term fiscal consolidation plan to prepare for rising aging-related fiscal costs; this plan will need to include higher tax revenue." In Europe, you ask? Well, for the IMF: "in a number of countries, elevated public debt and high fiscal deficits highlight the need for fiscal consolidation." And with lower oil prices: "most oil exporters need to recalibrate their medium-term fiscal consolidation plans." So oil importers might have more fiscal space, wouldn't they? But WEO tells us that: "continued fiscal consolidation, steady implementation of reforms, and external financing are needed to maintain macroeconomic stability" in those countries too. Wait, who doesn't need fiscal consolidation according to Blanchard and his WEO report?

If there is no magic number, they found a loophole and are arguing for a magic range it seems. Whatever the situation fiscal consolidation seems to be a solution. Given that Blanchard's conference is about rethinking policy, not theory, which presumably is doing fine, shouldn't one expect some change in policy advice?


  1. Matias-

    " No mention that intervening at the long end provides space for expansionary fiscal policy by reducing interest rates (the real reason for QE)."

    Given that long-term rates are a result of short term rate + inflation expectations, because supply and demand curves\actions in the Govt IOU (reserve & TSY-securities) markets are nothing at all like supply and demand curves\actions in commodities markets because of the nature of Govt IOU monopolies. Why would CBs need to do QE to bring long-term rates down? If Central banks announced a 10 year zero-rate policy, 10 year rates would converge around inflation expectations, and the CB wouldnt have to do any more QE than than "normally" have done through open market ops.

    1. Many topics in this. First, one thing is short term versus long term, another is nominal versus real. So inflation pertains to the difference between nominal and real, which I didn't discuss. Long and short term differences are associated to the risk of holding less liquid bonds over bills, as discussed in Kalecki's Theory of Economic Dynamics increasing risk principle. So the Fed can affect the remuneration of bonds in both ends of the spectrum, again as it has historically done.

    2. Matias-

      My point is about one specific topic in the one specific comment I quoted. It is not the case that QE (intervening in the long end of curve) is necessary to bring down long term interest rates. The Fed has maintained low and stable long term interest rates throughout the entire 80 year history of the modern Fed without QE so why would you think QE is necessary to bring down long term interest rates? The only two extraordinary periods were the volcker era of high rates and the WWII era of QE before the TSY-Fed accord of 1951.

    3. IOW-

      The Fed did not have to do QE (intervene in the long term end of the market) in order to bring down long term interest rates after the GFC in 2008. By simply announcing ZIRP, long term rates would have come down along with inflation and inflation expectations as they always have.

      Therefore, the statement of yours that I quoted is not true. QE was not necessary to reduce long term interest rates. Not to mention the fact that there is no such thing as restricted fiscal space for currency sovereigns. The ability of currency sovereigns to spend their own IOUs is always infinite, interest rates at 2% instead of 5% have nothing to do with this.


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