Session I: Monetary Policy
Session II: Fiscal Policy
A summary of Olivier Blanchard's summary of the conference: In what follows things in bold and italics are a mixture of my emphasis and Blanchard's. If you don't care what I think is important just follow the previous link...
- We’ve entered a brave new world in the wake of the crisis; a very different world in terms of policy making and we just have to accept it.
- In the age-old discussion of the relative roles of markets and the state, the pendulum has swung—at least a bit—toward the state.
- The crisis made it clear that there are many distortions relevant for macroeconomics, many more than we thought earlier. We had ignored them, thinking they were the province of the micro-economist. As we integrate finance into macroeconomics, we’re discovering distortions within finance are macro-relevant. Agency theory—about incentives and behavior of entities or “agents”—is needed to explain how financial institutions work or do not work and how decisions are taken. Regulation and agency theory applied to regulators is important. Behavioral economics and its cousin, behavioral finance, are central as well.
- Macroeconomic policy has many targets and many instruments (that is, the tools we use or variables to implement policy). There are many examples of this that were discussed at the conference
- We may have many policy instruments, but we are not sure how to use them. In many cases, we are uncertain about what they are, how they should be used, and whether or not they will work. Again, many examples came up during the conference.
- We don’t quite know what liquidity is, so a liquidity ratio is one more step into the unknown.
- It was clear that some people believe capital controls work and some don’t.
- Paul Romer made the point that, if you adopt a set of financial regulations and keep them unchanged, the markets will find a way around, and ten years later, you’ll have a financial crisis.
- Mike Spence talked about the relative roles of self-regulation and regulation. Both are needed, but how we combine them is extremely unclear.
- While these instruments are potentially useful, their use raises a number of political economy issues.
- Where do we go from here? In terms of research, the future is exciting. There are many topics on which we should work—namely macro issues with, as Joe Stiglitz said, the right micro foundations.
- Things are harder on the policy front. Given we don’t quite know how to use the new tools and they can be misused, how should policymakers proceed? While we have a good sense of where we want to get to, a step-by-step approach is the way to do it. Pragmatism is of the essence. This was a general theme that came up, for example, in Andrew Sheng’s discussion of the adaptive Chinese growth model. We have to try things carefully and see how they work.
- We have to keep our hopes in check. There are going to be new crises that we have not anticipated. And, despite our best efforts, we could have old-type crises again. That was a theme in Adair Turner’s discussion of credit cycles. Can we, using agency theory and the right regulations, get rid of credit cycles? Or is it basic human nature that, no matter what we do, they will come back in some form?