“Rethinking Macro Policy II: First Steps and Early Lessons”

That’s the title of an IMF conference taking place starting tomorrow (April 16-17). The program is below, and the live webcast will be available here (and follows up on a 2011 conference on the same subject).

Five years into the crisis, the contours of the macroeconomic policy of the future are only slowly coming into focus. From macroeconomic to financial stability, policy makers have realized that they have to watch many targets. They have also realized that they have potentially many more instruments at their disposal, from macro prudential tools to unconventional monetary policy. But how to map instruments to targets remains very much a work in progress. — Olivier Blanchard

Below is the agenda.

SESSION I: Monetary Policy, Chair: Janet Yellen


  • Lorenzo Bini-Smaghi
  • Mervyn King
  • Mike Woodford

SESSION II: Macroprudential Policies, Chair: Chair
Andy Haldane


  • Claudio Borio
  • Stanley Fischer
  • Choongsoo Kim

SESSION III: Financial Regulation, Chair: Sheila Bair


  • Jeremy Stein
  • Jean Tirole
  • John Vickers

SESSION IV: Fiscal Policy, Chair: Janice Eberly


  • Anders Borg
  • Roberto Perotti
  • Nouriel Roubini

SESSION V: Exchange Rate Arrangements, Chair: Agustín Carstens


  • Jay Shambaugh
  • Martin Wolf
  • Gang Yi

SESSION VI: Capital Account Management, Chair: Duvvuri Subbarao


  • Philipp Hildebrand
  • Márcio Holland de Brito
  • Hélène Rey


  • George Akerlof
  • Olivier Blanchard
  • David Romer
  • Joseph Stiglitz

Some of Olivier Blanchard’s views on the subject were recounted in this WSJ article.

For me, one key lesson from the last five years regarding macro policy relates to the plausibility of expansionary fiscal contraction at the zero lower bound (see [1], and this post). And one graph suffices to summarize that lesson.


Figure 1: Log real GDP for US (blue), and for UK (red), rescaled 2008Q1=0. Dashed line at election of Conservative/Liberal government. Source: BEA and ONS, and author’s calculations.

27 thoughts on ““Rethinking Macro Policy II: First Steps and Early Lessons”

  1. ppcm

    An eclectic panel of discussants , should this IMF conference be taking place in Moscow, one may have been tempted to recommend a stop over at the metro station Lubienka. The Russians,are bragging that the place holds “the tallest building in the world, since from the basement one can see Siberia”.

  2. Ricardo

    Menzie wrote:
    For me, one key lesson from the last five years regarding macro policy relates to the plausibility of expansionary fiscal contraction at the zero lower bound (see [1], and this post). And one graph suffices to summarize that lesson.
    It is amusing that a graph of goverment spending is your key lesson. The recent work of Alberto Alesina of Harvard is interesting. It shows that economic growth is stronger following government spending cuts and tax cuts, but weaker following government spending expansions. Here is a teaser for his article that can be found at the NBER site.
    Where is there anyone “Rethinking Macro Policy II: First Steps and Early Lessons” who is not a Keynesian? Just because capital based economists are ignored does not mean they do not exist. And just because demand theorists shout louder than production theorists does not make them right, even if they are rethinking how to sell their patent medicine.

  3. CoRev

    Ricardo, “Where is there anyone “Rethinking Macro Policy II: First Steps and Early Lessons” who is not a Keynesian?” my thoughts also.

  4. westslope

    Should the US monetary authority stick to price stability only?

    Should asset value stability be added to price stability mandates?

  5. JBH

    #1: Humility is in order. Something beyond humility is called for when an entire profession is unable to foresee ahead of time the gravest crisis in 80 years. If you cannot predict, it is not science.

    #2: The financial system matters — a lot. At least Blanchard learned this, which Minsky, Austrian economists, and others knew for decades.

    #3 Interconnectedness matters. Blanchard thinks about interconnectedness in terms of cross-country. Far more important is interconnectedness across time in that Keynesian policies enacted in the wake of the crisis are now in their fifth year of eating the economy’s seed corn. No civilization has ever survived without setting aside a surplus. The bankruptcy of Keynesianism, as anything other than a very short-term palliative to stop free-fall, is manifestly evident in this profound shortcoming. Surplus and Keynesianism are antithetical to each other.

    #4 We don’t know if macro-prudential tools work. Of course they do not and cannot not work if the objective is maximum sustainable growth. They are another in a long line of government interferences emanating from the New Deal obstructing the process of entrepreneurship and free market capitalism so that we are now in our fifth decade of decline.

    #5 Central bank independence wasn’t designed for what central banks are now asked to do. So the call is for more tools and more responsibility, eh? A clueless institution with prime responsibility for causing the three gravest economic crises since its inception – Great Depression, Stagflation, Credit Bubble, as well as debasing the currency far more than in the pre-1913 era – this institution, operating on the principles of Keynesianism, blind as a bat in its ability to see into the future, has the arrogance to ask for still more power.

  6. Manfred

    No Robert Lucas, no Robert Barro, no Thomas Sargent, no Nobuhiro Kiyotaki, no Neil Wallace, no Christopher Sims, no Harald Uhlig, no John Taylor, no John Cochrane. So much for the International Monetary Fund sponsoring a conference on “Rethinking Macro”.

  7. Menzie Chinn

    CoRev: Tirole is a Keynesian? Vickers too? Wow! You have an expansive definition of “Keynesian”. I think it is so expansive it is tautological — if you don’t like it/understand it, it’s Keynesian. Geez.

  8. Ricardo

    Not price stability or asset value stability but currency stability.
    The only problem is that the knowledge of how to stabilize the currency was lost in 1914.

  9. Ricardo

    What makes you think that Tirole is not a Keynesian?
    From the abstract of “Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning” by Jean Tirole
    “The paper provides a first analysis of market jumpstarting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy assets to the market. The government reduces adverse selection enough to let the market rebound… [Emphasis added]

  10. Brian

    Wow, I always thought Jean Tirole was an IO and micro-theory guy. I never knew Keynesianism had anything to do with that, Ricardo and CoRev. Will be interested to hear his thoughts on how to create regulatory structures for the financial industry, though.

  11. Menzie Chinn

    Ricardo: If you can find a credentialed PhD economist who characterizes Tirole and Vickers as fundamentally “Keynesian” in their world view, then I am happy to be enlightened. Many people write down models that have Keynesian-like attributes, but are not “Keynesians” as broadly understood in the profession. (E.g., Wow, I wrote down an money demand equation; Keynes implied one. QED, I must be a Keynesian!). I say again, Geez.

  12. CoRev

    Menzie, your counter is interesting in that you selected the two non-Keynesians as sources to support your own Keynesian contentions. Were they there to add blance? Were they there to foster alternative views? Were they supporting the “macro rethnking” view using Keynesian values?
    Moreover, I am interested that you actually responded to our comments prior to hearing Tirole and Vickers presentations.

  13. Ricardo

    Menzie wrote:
    Ricardo: If you can find a credentialed PhD economist who characterizes Tirole and Vickers as fundamentally “Keynesian” in their world view, then I am happy to be enlightened.
    You should relie less on authority and do more thinking for yourself. I posted a quote from Tirole that reeks of Keynesian leanings. Can you give me a quote where Tirole takes issue with any Keynesian policy? As you say, I will be happy to be enlightened.

  14. Menzie Chinn

    Ricardo: “relie”? I’m not relying on authority, I had to read some of these papers going through graduate school. That’s why a PhD is sometimes useful for knowing what the heck one is talking about.

  15. Anonymous

    Serious question. If debt continues to grow faster than GDP, at what point will you admit that the US cannot spend our way out of the current situation? When we are Japan and have 200% debt to GDP will you still be calling for more spending?
    Embedded in everything you believe is the assumption that the economy will soon grow at a historical norm. The problem is the US is not ever going to return to historical norms. We are old. We are highly regulated (compared to historical norms). Old regulated people don’t produce!!

  16. Anonymous

    Cochrane on the economists at the IMF conference.
    “I find this most striking as a reflection on what the IMF considers “macro.” Yes, they have the whole spectrum, indeed, all the way from Geroge Akerlof and Joe Stiglitz on the far left end of traditional Keynesian economics, to… Olivier Blanchard and David Romer on the pretty-far left end of somewhat new-Keynesian economics?
    Don’t get me wrong, these are all very smart people, in the whole program and the final panel. Akerlof was one of my thesis advisers, and a lot of what I learned from him sticks with me today. But really, this is the entire spectrum of macro? Has anyone heard of, oh, Lucas, Sargent, Sims, Prescott and all their many descendants? Especially if the project is to “rethink,” would not some slight broadening of a spectrum have made sense?
    It is a sharp lesson in the range of ideas that the IMF will bring to anything they do.”

  17. 2slugbaits

    Anonymous This is fiscal contraction?
    No, your numbers are simply irrelevant to what constitutes “fiscal contraction.” The right way to look at things is by looking at the cyclically adjusted primary deficit, and by that standard the UK is unambiguously pursuing a policy of fiscal contraction. And it doesn’t matter whether you use the IMF numbers or the OECD numbers:
    Any way you look at it, the UK cyclically adjusted primary deficit is shrinking rather dramatically.

  18. Ra2000

    Lucas, Sargent, Prescott, Kydland, Cochrane…? Are you kidding me? These are macro theory people, not macro policy. They support a theory that has NOTHING to say about monetary policy and that assumes all government spending is a waste (by assuming that public spending doesn’t enter the production function or the utilty function). You should know that stabilization policies don’t play any role in their model… (and macro prudential policies likely doesn’t play any role either since in most cases there is no financial intermediaries). And why should they if prices are fully flexible, markets clear at all times (yes, there is no cyclical unemployment) and money is a veil. It’s not just that these models didn’t predict the Great Recession, they cannot even explain what happened after the fact! They’re totally silent about any policy debate… Why should they be invited?

  19. Anonymous

    It’s hard to have a serious discussion with people who say “NO NO USE MY MASSAGED MADE UP METRIC!!” and people who claim increasing spending 15-20% in 5 years is fiscal contraction. Using cyclically adjusted numbers presumes you know the proper way to adjust for the cycle, which is laughable. Of course economic liberals think they have the knowledge to micromanage an economy affected by billions of people, so I’m not surprised.

  20. Menzie Chinn

    Anonymous (11:07): 2slugbaits is right. Using nominal pounds is just plain silly. And wow, that graph in the link you provided should tell it all.

    Anonymous (11:10): I would say that the question is not deficits per se, but eqn (2) in this post. That is, one wants to see the primary deficit reduced sufficiently, and growth sufficiently high.

  21. anon2

    I love these religious discussions.
    But I really think we need a new faith: One that neither worships stimulus spending nor austerity.
    I think that Steve Waldman is onto something when he writes: “Why did World War II, one of the most destructive events in the history of world, engender an era of near-full employment and broad-based prosperity, both in the US where capital and infrastructure were mostly preserved, and in Europe where resources were obliterated? People have lots of explanations, and I’m sure there’s truth in many of them. But I think an underrated factor is the degree to which the war “reset” the inequalities that had developed over prior decades.” http://www.interfluidity.com/v2/3487.html
    So let’s not argue about stimulus and austerity. Instead let’s argue about how to get rid of entrenched interests and level the playing fields.
    Who knows? Maybe 50 years of entrenched interests, the barnacles on the ship of state and the aquatic weeds fowling the propellors of private enterprise, all those rent-seekers, are strangling our economies and causing Tyler Cowen’s Great Stagnation. It could be that both stimulus and austerity are powerless when the weight of entrenched interests becomes too much.
    Religion is so refreshing!

  22. Fulton Wilcox

    Three points:
    1. The craft of decision-oriented U.S. national macroeconomics, centered on teasing out meaning from associations among very high end, synthetic metrics like GDP, money aggregates, etc. needs to morph into national microeconomics paying much more attention to prospective and actual cause and effect along the lines of business case analysis.
    2. One step in this “reform” is to focus attention on America’s “balance sheet” – imperfectly but helpfully instantiated by the Federal Reserve’s B100 “Balance Sheet of Households and Nonprofits.”
    To the microeconomic investor, it is unfortunate that anyone at the national level (including the electorate in picking leaders) would make substantial investment/disinvestment decisions based on “income statement” data in isolation from balance sheet data. Nevertheless, as a benchmark of the “state of the macroeconomic art” in a decision-oriented context, the Congressional Budget Office published in February 2013 its annual economic forecast (through 2023) with year by year detail regarding GDP, employment etc, but bereft of projections of what “America’s balance sheet” values – assets, liabilities, and net worth – are expected to be in 2023 or any of the intervening years. As of 12/31/2012, B100 household balance sheet assets totaled $79.5 trillion, liabilities $13.5 trillion and net worth $66.1 trillion, while by 2023 these are likely to increase (if they move in concert with the CBO’s CBO projections of GDP) to assets of $110 trillion, debt of $18 trillion and a net worth of $91.4 trillion (in 2012 $).
    Many Americans figuratively or literally stand in front of a Federal digital “debt clock” watching the numbers whirl away without ever asking “where is the asset clock?” Similarly, the Federal Reserve’s release notes for the quarterly B100 report almost never even reference the existence of “assets” let alone comment on asset mark-to-market movements.
    A few additional observations are published at
    3. The debate over what to do in the aftermath of broken bubbles suffers because of lack of holistic analysis and feedback of various investment options – with both the Federal Government (and state governments) being actual or potential countercyclical investors – is hindered by a failure to look at both the quasi income statement (GDP) and the balance sheet. All stimulus comes to rest in the national balance sheet.
    My interest has been in the stimulus multiplier. An initial injection of fresh “stimulus” demand into the GDP spawns a potentially infinite succession of GDP-tracked transactions, but with leakage into savings reducing the multiplier from infinity to some small number. Absent leakage, Herbert Hoover’s 1930’s vintage infrastructure deficit spending would still be propagating through today’s GDP.
    Today’s macroeconomic estimates of stimulus multipliers tend to be quite low – often two or even less, which implies a savings rate (whether as a transfer into assets or loan paydowns) of 50% per transaction cycle rather than the real savings rate of less than 10% – which would yield a multiplier of ten.
    The reported difference is probably not a function of the savings rate, but the inability of macroeconomic analysts 1) to determine if the presumed stimulus actually went into purchases reflected in the GDP or instead went directly into the balance sheet, and 2) to discriminate between true leakage into the balance sheet versus the myriad of updrafts and downdrafts impacting the outcome metrics relied on for macroeconomic studies. There is also the question of delivery mechanism, because for example “TARP” delivered by a swashbuckling “make it happen” personality like Jesse Jones of Hoover/Roosevelt’s Reconstruction Finance Corporation probably had more market impact than the more tentative efforts of today.
    Also see:

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