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?

Lars P. Syll on how wrong Krugman & Mankiw are on loanable funds

By Lars P. Syll

Earlier this autumn yours truly was invited to participate in the New York Rethinking Economics conference. A busy schedule didn’t allow me to “go over there.” Fortunately some of the debates and presentations have been made available on the web, as for example here. Listening a couple of minutes into that video one can hear Paul Krugman strongly defending the loanable funds theory. Unfortunately this is not an exception among “New Keynesian” economists. Neglecting anything resembling a real-world finance system, Greg Mankiw — in the 8th edition of his intermediate textbook Macroeconomics — has appended a new chapter to the other nineteen chapters where finance more or less is equated to the neoclassical thought-construction of a “market for loanable funds."

Read rest here.

For an explication and presentation of the extent to which LFT is derivative of modern neo-Wicksellian macroeconomics, see here.