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  • Writer's picturePete Jonson

Saturday Sanity Break, 4 November 2017 - Rethinking Macroeconomics

Gor blimey, comrades. signs of progress in economics.

A good friend has just attended a meeting of the great men and women of Macroeconomics. He kindly sent me the program, which thoughtfully has link to papers, presentations and discussions.

Today I present material from the overview, a summary of the introductory material and my comments, in italics.

As I read the other material I plan to present summaries of and comments on other papers. The entire material is available immediately below so you can go hunt yourself if you wish to read it all more or less immediately.

‘Academic experts and policymakers addressed the challenges to macroeconomic thinking and policymaking that today’s economic environment presents–low inflation despite low unemployment, the apparent interactions of rising inequality and stagnating productivity, and the unresponsiveness of long-term interest rates to rising public debt, among others.’

Introductory opening presentation.

Olivier Blanchard and Lawrence H. Summers

Rethinking macro stabilization Back to the future

‘Nearly ten years after the onset of the Great Financial Crisis, both researchers and policy makers are still assessing the policy implications of the crisis and its aftermath. Previous major crises, from the Great Depression to the stagflation of the 1970s, profoundly changed both macroeconomics and macroeconomic policy’.

Good opening.

‘The crisis has forced macroeconomists to (re)discover the role and the complexity of the financial sector, and the danger of financial crises. But the lessons should go largely beyond this, and force us to question a number of cherished beliefs. Among other things, the events of the last ten years have put into question the presumption that economies are self stabilizing, have raised again the issue of whether temporary shocks can have permanent effects, and have shown the importance of non linearities’.

One big question is whether there is an agreed ‘scientific method’ to analyse these matters.

Two previous crises: 'The Great Depression of the 1930s, ... led to the Keynesian revolution, a worry about destabilizing processes, a focus on aggregate demand and the crucial role of stabilization policies. The [ stagflation of the 1970s] led instead to the partial rejection of the Keynesian model, a more benign view of economic fluctuations and the self-stabilizing properties of the economy, and a focus on simple policy rules’.

Seems to me like they are calling for carefully constructed, empirical models where hypotheses can be rejected.

Then there are four sections listed below and two paragraphs of conclusion, the second of which I post.

* Main three lessons from the last ten years.

* Implications for monetary policy

* Implications for fiscal policy

* Focus on financial policies

* Conclusions

‘What we specifically suggest is the following: The combined use of macro policy tools to reduce risks and react more aggressively to adverse shocks. A more aggressive monetary policy, creating the room needed to handle another large adverse shock—and while we did not develop that theme at length, providing generous liquidity if and when needed. A heavier use of fiscal policy as a stabilization tool, and a more relaxed attitude vis a vis debt consolidation. And more active financial regulation, with the realization that no financial regulation or macroprudential policy will eliminate financial risks. It may not sound as extreme as some more dramatic proposals, from helicopter money, to the nationalization of the financial system. But it would represent a major change from the pre-crisis consensus, a change we believe to be essential.’

This seems sensible, but I missed three points I think are important. With large and still rising debt in developed nations – government, corporate and household – how big are the headwinds produced even while interest rates are so low. And what happens when interest rates rise to more normal levels?

On ‘nationalisation’, what about bailout by governments being paid for by shareholders issuing new paper to government – at least 10 or 20 % of existing – so long suffering taxpayers can be paid for their efforts by sale of the new capital when companies recover.

And surely senior managers should ‘pay’ for their incompetence by loss of accumulated bonuses. These should be kept for, say, 5 years after retirement or move to new job and only paid out if company is still in reasonable shape by them.

Here is a gem from the final paper in the set.

Gita Gopinath

‘There is now a new consensus that capital account liberalizations are a mixed blessing, they are associated with excess volatility tied to abrupt surges and reversals in capital flows, and consequently there can be prudent limits to capital account liberalization’.

This is the thrust of my 2013 paper, which the mighty RBA has failed to recognise. Time to pay attention, lads.


Fiona Prior falls heavily for the monstrous Carrion. More here.

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