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IMF Paper

IMF Paper

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I M F S T AF F P O S I T I O N N O T E
 
February 12,2010
SPN/10/03
Rethinking Macroeconomic Policy
Olivier Blanchard, Giovanni Dell’Ariccia,and Paolo Mauro
INTERNATIONAL MONETARY FUND
 
INTERNATIONAL MONETARY FUNDResearch Department
Rethinking Macroeconomic Policy
1
Prepared by Olivier Blanchard, Giovanni Dell’Ariccia,and Paolo MauroAuthorized for Distribution byOlivier BlanchardFebruary 12,2010
Disclaimer: The views expressed herein are those of the authors and should not beattributed to the IMF, its Executive Board, or its management.
The great moderation lulled macroeconomists and policymakers alike in the belief that weknewhow to conduct macroeconomic policy. The crisis clearly forces us to question thatassessment. In this paper, we review the main elements of the pre-crisis consensus, weidentifywhere we were wrong and what tenets of the pre-crisis framework still hold, and takea tentative first pass at the contours of a new macroeconomic policyframework.JELClassification Numbers:E44, E52, E58, G38, H50Keywords: Macroeconomic policy, macroprudential regulation, inflation targets, automaticstabilizersAuthors’ Email Addresses:oblanchard@imf.org;gdellariccia@imf.org; pmauro@imf.org 
1
One of the series of “Seoul papers” on current macro and financial issues. Olivier Blanchard is the IMF’sEconomic Counsellor and Director of the Research Department; Giovanni Dell’Aricciais an Advisor in theResearch Department; Paolo Mauro is a Division Chief in the Fiscal Affairs Department. Helpful inputs fromMark Stone, Stephanie Eble, Aditya Narain, and Cemile Sancak are gratefully acknowledged. We thank TamBayoumi, Stijn Claessens, Charles Collyns, Stanley Fischer, Takatoshi Ito, Jean Pierre Landau, John Lipsky,Jonathan Ostry, David Romer, Robert Solow, Antonio Spilimbergo, Rodrigo Valdes, and Atchana Waiquamdeefor their comments.
 
2ContentsPageI. Introduction............................................................................................................................3II. What We Thought We Knew................................................................................................3A. One Target: Stable Inflation......................................................................................3B. Low Inflation.............................................................................................................4C. One Instrument: The PolicyRate..............................................................................5D. A Limited Role for Fiscal Policy..............................................................................5E. Financial Regulation: Not a Macroeconomic PolicyTool........................................6F. The Great Moderation................................................................................................7III. What We Have Learned from the Crisis..............................................................................7A. Stable Inflation May Be Necessary, but Is Not Sufficient........................................7B. Low Inflation Limits the Scope of MonetaryPolicyin DeflationaryRecessions....8C. Financial Intermediation Matters..............................................................................8D. Countercyclical Fiscal Policy Is an Important Tool..................................................9E. Regulation Is Not MacroeconomicallyNeutral.........................................................9F. Reinterpreting the Great Moderation.......................................................................10IV. Implications for the Design of Policy................................................................................10A. Should the Inflation Target Be Raised?..................................................................10B. Combining Monetaryand Regulatory Policy..........................................................11C. Inflation Targeting and Foreign Exchange Intervention.........................................13D. Providing Liquidity More Broadly.........................................................................14E. Creating More Fiscal Spacein Good Times............................................................14F. Designing Better Automatic Fiscal Stabilizers........................................................15V. Conclusions.........................................................................................................................16References……………………………………………………………………………………17

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