Seven years since the onset of the global financial crisis, we are still assessing how the crisis should change our views about macroeconomic policy. To take stock, the IMF organized two conferences, the first in 2011, the second in2013, and published the proceedings in two books, titled “In the Wake of the Crisis” and “What Have We Learned?“.
The time seems right for a third assessment. Research has continued, policies have been tried, and the debates have been intense. But have we truly made much progress? Are we closer to a new framework? To address these questions, Raghuram Rajan, Ken Rogoff, Larry Summers and I are organizing a third conference, “Rethinking Macro Policy III: Progress or Confusion?” that will take place on April 15-16 at the IMF.
Much of the discussion in recent years has centered (rightly) on the policy issues of the day: What measures to take during a financial or sovereign crisis, what to do at the zero lower bound, how to design quantitative easing, at what rate should fiscal consolidation take place?
The focus of our conference will be instead on the architecture of policy when (hopefully) policy rates have become positive again, and most countries are growing and have stabilized debt-to-GDP ratios.
In other words, how will/should macro policy look once the crisis is finally over?
Here are some questions to start the discussion (I hope, in a later blog, to summarize the answers coming out of the conference).
It is now well understood that the financial crisis resulted from the interaction of excessive leverage in the financial system and extensive interconnectedness and complexity of balance sheets of both banks and non banks. In other words, the crisis revealed the presence of large, undetected, systemic risks. Since then, much effort has gone toward improving our understanding and assessment of systemic risk. Questions: Where do we stand? Are some dimensions of systemic risk easier to measure (e.g., leverage in the banking sector vs. interconnectedness of banks and non-banks or risks outside the banking sector)? How should we assess the experience with stress-tests? And have we made enough progress in reducing systemic risk since the crisis, e.g., with Dodd-Frank, the Vickers commission, the Financial Stability Board, etc?
Macro Prudential Policies
Macro prudential tools, that is state-dependent regulations, are the new policy kids on the block. A standard example is maximum loan-to-value ratios, which can be adjusted as a function of the state of the housing market. Properly used, the argument goes, macro prudential tools can be designed and targeted to deal with the many dimensions of financial risk, allowing fiscal and monetary policy to deal with their traditional mandates.
In practice however, the story is much less clean.