What Have We Learned?

What Have We Learned?: Macroeconomic Policy after the Crisis

George Akerlof
Olivier Blanchard
David Romer
Joseph Stiglitz
Copyright Date: 2014
Published by: MIT Press
Pages: 368
https://www.jstor.org/stable/j.ctt9qf899
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  • Book Info
    What Have We Learned?
    Book Description:

    Since 2008, economic policymakers and researchers have occupied a brave new economic world. Previous consensuses have been upended, former assumptions have been cast into doubt, and new approaches have yet to stand the test of time. Policymakers have been forced to improvise and researchers to rethink basic theory. George Akerlof, Nobel Laureate and one of this volume's editors, compares the crisis to a cat stuck in a tree, afraid to move. In April 2013, the International Monetary Fund brought together leading economists and economic policymakers to discuss the slowly emerging contours of the macroeconomic future. This book offers their combined insights. The editors and contributors--who include the Nobel Laureate and bestselling author Joseph Stiglitz, Federal Reserve Vice Chair Janet Yellen, and the former Governor of the Bank of Israel Stanley Fischer--consider the lessons learned from the crisis and its aftermath. They discuss, among other things, post-crisis questions about the traditional policy focus on inflation; macroprudential tools (which focus on the stability of the entire financial system rather than of individual firms) and their effectiveness; fiscal stimulus, public debt, and fiscal consolidation; and exchange rate arrangements.

    eISBN: 978-0-262-32344-4
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-viii)
  3. Introduction: Rethinking Macro Policy II—Getting Granular
    (pp. 1-28)
    Olivier Blanchard, Giovanni Dell’Ariccia and Paolo Mauro

    The 2008–2009 global economic and financial crisis and its aftermath keep forcing policymakers to rethink macroeconomic policy. First was the Lehman crisis, which showed how much policymakers had underestimated the dangers posed by the financial system and demonstrated the limits of monetary policy. Then it was the euro area crisis, which forced them to rethink the workings of currency unions and fiscal policy. And throughout, they have had to improvise, from the use of unconventional monetary policies, to the provision of the initial fiscal stimulus, to the choice of the speed of fiscal consolidation, to the use of macroprudential...

  4. Part I: Monetary Policy
    • 1 Many Targets, Many Instruments: Where Do We Stand?
      (pp. 31-36)
      Janet L. Yellen

      Thank you to the International Monetary Fund for allowing me to take part in what I expect will be a very lively discussion.¹

      Only five or six years ago, there wouldn ’ t have been a panel on the “many instruments” and “many targets” of monetary policy. Before the financial crisis, the focus was on one policy instrument: the short-term policy interest rate. Although central banks did not uniformly rely on a single policy target, many adopted an “inflation targeting” framework that, as the name implies, gives a certain preeminence to that one objective. Of course, the Federal Reserve has...

    • 2 Monetary Policy, the Only Game in Town?
      (pp. 37-44)
      Lorenzo Bini Smaghi

      In addressing monetary policy’s targets and instruments, I would like to focus on how much of the precrisis inflation-targeting frameworks we should keep going forward. There are two dimensions to the issue. The first relates to the ability of the inflation-targeting framework to ensure price stability, in particular during times of market exuberance, which may lead to the buildup of bubbles, whose burst jeopardizes financial stability and thus price stability. In light of experience, a pure inflationtargeting framework, one that ignores financial imbalances, may not allow a proper calibration of monetary policy. The second dimension relates to the postcrisis developments,...

    • 3 Monetary Policy during the Crisis: From the Depths to the Heights
      (pp. 45-54)
      Mervyn A. King

      The past five years have been an extraordinary period for central banks. The breadth and scale of our operations have expanded in ways that were previously unimaginable as we responded to a crisis in the banking sector and the wider economy. In monetary policy, we have moved into uncharted territory. But has our notion of what central banks should do, and how, changed? Now is a good time to reflect on where we stand.

      I want to focus this discussion on two areas. First, I want to distill what have we learned about the objectives of monetary policy. Second, I...

    • 4 Monetary Policy Targets after the Crisis
      (pp. 55-62)
      Michael Woodford

      During the global financial crisis and its aftermath, central banks have undertaken unprecedented actions of many kinds. This raises a natural question: has the crisis revealed that the previous consensus framework for monetary policy was inadequate and should now be fundamentally reconsidered? It is surely true that central banks were not too well prepared for the crisis and that new policies had to be created, to a large extent on the fly. And it would obviously be desirable to try to learn from this experience, to be better prepared for an appropriate response next time and perhaps even to reduce...

  5. Part II: Macroprudential Policy
    • 5 Macroprudential Policy in Prospect
      (pp. 65-70)
      Andrew Haldane

      Macroprudential policy is the new kid on the block, perhaps even the next big thing. Hopes are high. Reflecting that, we have new macroprudential agencies and policies popping up all over the world, in both developed and developing economies (see, e.g., Aikman, Haldane, and Kapadia 2013). But that begs the question: What actually is macroprudential policy? How should it be executed? And how effective will it be?

      This session is well positioned to answer these questions, coming after the one on monetary policy, because there are direct parallels with, and lessons that can be learned from, monetary policy in the...

    • 6 Macroprudential Policy and the Financial Cycle: Some Stylized Facts and Policy Suggestions
      (pp. 71-86)
      Claudio Borio

      This chapter seeks to provide some context for the macroprudential policy debate. The objective is to explore what I considerthemajor source of systemic risk, namely, the financial cycle and its link with systemic financial (banking) crises and the far better known business cycle. I would like to highlight a few stylized facts and then turn to the implications for macroprudential policy.

      By “financial cycle” I mean, somewhat loosely, the self-reinforcing interaction between risk perceptions and risk tolerance, on the one hand, and financing constraints on the other that, as experience indicates, can lead to serious episodes of financial...

    • 7 Macroprudential Policy in Action: Israel
      (pp. 87-98)
      Stanley Fischer

      Macroprudential policy or supervision relates to the behavior of the financial system as a whole, with a focus on systemic interactions, systemic indicators, and systemic risk. The consequences of the Lehman Brothers bankruptcy are the archetype of the result of systemic risk. Macroprudential supervision and policy are directed at monitoring these risks and using available tools to reduce the risks and the consequences of their occurrence.

      However, the word “macroprudential” is used in a variety of senses, and it is not clear that we all mean the same thing when we use the term. In this chapter I discuss mainly...

    • 8 Korea’s Experiences with Macroprudential Policy
      (pp. 99-126)
      Choongsoo Kim

      Korea has good experience in using macroprudential policies to address financial risks in the housing and foreign exchange markets. These two markets have been key sources of the systemic risk in Korea, given their high market volatility and susceptibility to bubbles, and with the significant potential to wreak havoc on the broader economy in case of market dislocation. Indeed, after a precipitous fall during the 1997–1998 financial crisis, house prices rose at a rapid pace in the first half of the 2000s, aided by a strong expansion of credit to households. Similarly, the foreign exchange (FX) market experienced an...

  6. Part III: Financial Regulation
    • 9 Everything the IMF Wanted to Know about Financial Regulation and Wasn’t Afraid to Ask
      (pp. 129-134)
      Sheila Bair

      I was honored when the IMF asked me to moderate the “Financial Regulation” panel at this year’s “Rethinking Macro Policy II” conference. And while naturally I delivered one of the more enlightening and thoughtprovoking policy discussions of the conference, I did fail in my duties as moderator to make sure the panelists covered all the excellent questions our sponsors submitted to us. Of course, this was to be expected, as panelists at these types of events almost never address the topics requested of them (I certainly never do) but rather, like presidential candidates, answer the questions they want to answer....

    • 10 Regulating Large Financial Institutions
      (pp. 135-142)
      Jeremy C. Stein

      I will focus my remarks on the ongoing regulatory challenges associated with large, systemically important financial institutions, or SIFIs. In part, this focus amounts to asking a question that seems to be on everyone ’ s mind these days: Where do we stand with respect to fixing the problem of “too big to fail” (TBTF)? Are we making satisfactory progress, or it is time to think about further measures?

      I should note at the outset that solving the TBTF problem has two distinct aspects. First, and most obvious, one goal is to get to the point where all market participants...

    • 11 The Contours of Banking and the Future of Its Regulation
      (pp. 143-154)
      Jean Tirole

      Aftermaths of banking, sovereign, and other crises often look alike: after years of neglect and quasi-laissez-faire leading to a crisis, policymakers and scholars work assiduously on new schemes that will prevent the next crisis. While this constitutes a useful reaction, the process also reflects political immediacy as much as a long-term perspective. The title of the conference, “Rethinking Macro Policy II: First Steps and Early Lessons,” modestly but rightly reminds us of the limits of our knowledge in these areas.

      This chapter briefly discusses three kinds of reforms in the making in financial regulation: structural reforms (among which I would...

    • 12 Banking Reform in Britain and Europe
      (pp. 155-164)
      John Vickers

      An international discussion on the structure of banking has taken a long time to get going. In the United States, the structural debate since the global economic crisis of 2008–2009 has focused on how to implement the Volcker rule, which prohibits banks from engaging in proprietary trading that is not customer-related. In the United Kingdom, the discussion has concentrated on ring-fencing—the separation within banking groups of retail and investment banking. France and Germany are developing the mild hybrid of ring-fencing some proprietary trading. The first international consideration of structural reform was the Liikanen (2012) report for the European...

    • 13 Leverage, Financial Stability, and Deflation
      (pp. 165-176)
      Adair Turner

      In 2009, Queen Elizabeth visited the Economics Department of the London School of Economics, discussed the financial crisis, and asked a simple question: “Why did no one see it coming?” It was a good question, but one that could now be expanded, because there were two failures.

      First, there was a failure to foresee the crisis coming at all—a failure in, say, 2005 or 2006 or 2007 to understand that we were heading toward a major financial crash. There were some notable exceptions. To different degrees, Nouriel Roubini, Raghu Rajan, and Bill White issued some warnings. But on the...

  7. Part IV: Fiscal Policy
    • 14 Defining the Reemerging Role of Fiscal Policy
      (pp. 179-182)
      Janice Eberly

      Whereas much of the policy innovation during the financial crisis of 2008–2009 focused on monetary policy—and especially unconventional monetary policy—there has since been renewed attention to fiscal policy. The monetary focus manifested in part because monetary authorities were able to move quickly and decisively during the crisis, whereas fiscal policy tends to be slower, both in decision making and in implementation. But the renewed attention to the potential power of fiscal policy came as the severity of the crisis demanded that all available tools be brought to bear and also as the limits of monetary effectiveness may...

    • 15 Fiscal Policy in the Shadow of Debt: Surplus Keynesianism Still Works
      (pp. 183-192)
      Anders Borg

      The theme of this conference is rethinking macro policy, and I would like to outline some important lessons from the global economic crisis since 2008 for the design of fiscal policy, drawing on my experience as Sweden’s minister for finance and as a member of the Ecofin Council (Economic and Financial Affairs Council of the European Union) over the past six years. In this chapter I focus on the current role of fiscal policy and on a number of important lessons the crisis has taught us, and conclude with a discussion of the problems Europe has to tackle. This chapter...

    • 16 Fiscal Policies in Recessions
      (pp. 193-208)
      Roberto Perotti

      Ideally, a government would like to use fiscal policy as a countercyclical tool while at the same time convincing the markets that it remains solvent and/or its government debt remains sustainable.¹ What itcando depends on the initial situation. In this chapter I consider a policymaker that has some “fiscal space.” In other words, there is room for some, perhaps temporary, increase in the deficit. In more mundane terms, the “debt vigilantes” are not active. Admittedly, these are loose terms; I will not try to define them formally, and even less to determine a threshold for when “fiscal space”...

    • 17 Fiscal Policy
      (pp. 209-222)
      Nouriel Roubini

      The recent global financial crisis has brought the attention of analysts and policymakers back to the role of fiscal policy during the crisis and its aftermath. Several important questions need to be addressed: What is the relationship between levels of public debt and economic growth? What are the causes of high debt and deficits—loose fiscal policy or weak economic growth? What is the size of fiscal multipliers, and how do they depend on business cycle conditions? Is there a risk of fiscal dominance? How can we reduce a debt overhang and achieve a smoother deleveraging from high debt ratios?...

  8. Part V: Exchange Rate Arrangements
    • 18 How to Choose an Exchange Rate Arrangement
      (pp. 225-228)
      Agustín Carstens

      The choice of the appropriate exchange rate regime for any country is an issue that has been extremely important in the past and still is today. It is a policy decision that, to a large extent, conditions the macroeconomic framework of a country. This chapter discusses a number of issues related to this important decision. First it discusses the importance of choosing the exchange rate regime. It then analyzes the implications of the degree of exchange rate rigidity or flexibility for the domestic economy, particularly for other macroeconomic policies. Then it discusses the specific case of the euro area. Finally,...

    • 19 Rethinking Exchange Rate Regimes after the Crisis
      (pp. 229-244)
      Jay C. Shambaugh

      The exchange rate regime decision is one of the most important ones a country can make in terms of macroeconomic policy. It has important implications for how a country will manage its financial account and its monetary policy options. This brief chapter cannot run through all aspects of the decision but will instead focus on one thing: what have we learned from the 2008–2009 crisis about the experience of fixed versus floating exchange rates, as well as the institutional design of currency unions.

      My thesis is that we have relearned many things we should already have known before the...

    • 20 Exchange Rate Arrangements: Spain and the United Kingdom
      (pp. 245-256)
      Martin Wolf

      The creation of the euro was among the most revolutionary developments in monetary history. Advanced European economies agreed to replace their national monies with a shared fiat currency, managed by a jointly owned institution, the European Central Bank (ECB). They did this, moreover, without agreeing to any of the other features of contemporary monetary areas, notably mechanisms for fiscal transfers or for common regulation and support of the banking system. In all these respects, the governments of member states remained sovereign, if notionally constrained by a set of rules governing fiscal deficits and debt.

      A possible justification for this extremely...

    • 21 Exchange Rate Arrangements: The Flexible and Fixed Exchange Rate Debate Revisited
      (pp. 257-262)
      Gang Yi

      China is a large country with tremendous differences across its land. The diversities between eastern and western regions to some extent exceed those of the euro zone. For instance, in the eastern part of China (such as the Pearl River Delta), the per capita income is about five times that of the western part (such as Guizhou Province and Qinghai Province), whereas inside the euro area, Germany’s per capita income is only about 1.5 times that of Greece. However, even with these differences, China is still better positioned as an optimal currency area than the euro area and can issue...

  9. Part VI: Capital Account Management
    • 22 Capital Account Management: Toward a New Consensus?
      (pp. 265-270)
      Duvvuri Subbarao

      The change in our worldview on capital account management is by far one of the most remarkable intellectual shifts brought on by the crisis. In her opening remarks at the conference, IMF Managing Director Christine Lagarde said that the crisis shattered the consensus on many macroeconomic issues and shibboleths. Nowhere is this more true than in the broad policy area of capital account management. In my view, the three big issues on which the precrisis consensus has dissolved are the following: first, movement toward a fully open capital account; second, the use of capital controls as short-run stabilization tools; and...

    • 23 Capital Flows and Capital Account Management
      (pp. 271-288)
      José De Gregorio

      International financial integration and capital account management have been central issues in the policy discussion in recent years. However, these issues are not new in emerging market economies. Some of these economies have had disastrous experiences with financial crisis, most of the time caused by mishandled financial integration and weak macroeconomic policies. The resilience of emerging market economies, in particular their financial systems, during the recent global financial crisis shows that some key lessons have been learned.

      The external balance has usually been at the center of financial and currency crises. Periods of exuberance, capital account liberalization, rigidities in the...

    • 24 Managing Capital Inflows in Brazil
      (pp. 289-306)
      Márcio Holland

      This chapter presents the recent Brazilian experience of dealing with capital inflows associated with domestic currency appreciation, and the use of macroprudential measures to cope with the capital surges. Restrictions on the financial account in Brazil are only some of the ingredients of the country’s economic policy, which includes controlling inflation along with maintaining a conventional monetary policy, as well as macroprudential measures, a fiscal consolidation program, a solid financial system, a focus on investment and infrastructure, and a very comprehensive income inequality-reduction policy.

      The consequences of the 2008–2009 international financial turmoil have not yet come to an end,...

    • 25 Capital Account Management
      (pp. 307-314)
      Hélène Rey

      I will start by asking basic questions about international capital flows. Many policy discussions are based on the premise that international capital flows bring some important benefits to countries’ economies. When asked more precisely, policymakers identify two main benefits of international capital flows: improvements in allocative efficiency and in risk sharing. Because of financial integration, capital can flow to places where it is put to its most productive use, that is, places where the marginal product of capital is highest. This view comes, of course, straight from the neoclassical growth model.

      Policymakers would add that international capital flows are also...

  10. Part VII: Conclusions
    • 26 The Cat in the Tree and Further Observations: Rethinking Macroeconomic Policy II
      (pp. 317-320)
      George A. Akerlof

      I learned a lot from the conference, and I’m very thankful to all the speakers. I have been asked to give my overall view of the conference. Do I have an image of the whole thing? I don’t know whether my image will help anybody at all, but my view is that it’s as if a cat has climbed a huge tree. It’s up there and, oh, my God, we have this cat up there. The cat, of course, is this huge economic crisis that has been upon us since 2008.

      Everyone at the conference had some ideas about what...

    • 27 Rethinking Macroeconomic Policy
      (pp. 321-326)
      Olivier Blanchard

      The IMF’s second conference on rethinking macroeconomic policy in the wake of the 2008–2009 economic crisis has underscored the many challenges that lie ahead for policymakers. Rethinking and reforms are both taking place. But we still do not know the final destination, be it for the redefinition of monetary policy, or the contours of financial regulation, or the role of macroprudential tools. We have a general sense of direction, but we are largely navigating by sight.

      In this chapter I review six examples raised at the conference to underscore our lack of knowledge concerning the “correct” trajectory to take...

    • 28 Preventing the Next Catastrophe: Where Do We Stand?
      (pp. 327-334)
      David Romer

      As I listened to the presentations and discussions, I found myself thinking about the conference from two perspectives. One is intellectual: Did we ask provocative questions? Were interesting ideas proposed? Were we talking about important issues? By that standard, the conference was very successful: the contributions and discussions were extremely stimulating, and I learned a great deal.

      The second perspective is practical: Where do we stand in terms of averting another financial and macroeconomic disaster? By that standard, I fear we are not doing nearly as well. As I will describe, my reading of the evidence is that the events...

    • 29 The Lessons of the North Atlantic Crisis for Economic Theory and Policy
      (pp. 335-348)
      Joseph E. Stiglitz

      In analyzing the financial crisis that began in 2007 and led to the Great Recession, we should try to benefit from the misfortune of recent decades: The approximately 100 crises that have occurred during the last 30 years—as liberalization policies became dominant—have given us a wealth of experience and mountains of data. If we look over a 150-year period, we have an even richer data set.

      With a century and a half of clear, detailed information on crisis after crisis, the burning question is not How did this happen? butHow did we ignore that long history, and...

  11. Contributors
    (pp. 349-350)
  12. Index
    (pp. 351-360)