Which Way the Wind Blows

By Jeff Hayden

You can call this edition of F&D magazine our Bob Dylan issue. It may seem odd for an economics magazine to draw inspiration from the legendary singer/songwriter, but one of his most famous lines, “The times, they are a-changin,’” reverberated through our corridors as we put together this special issue on the global economy’s past and future.

We weren’t humming the tune to pass the time. The lyrics seemed especially relevant to us this year, as we mark the 70th anniversary of the IMF and World Bank and the 50th anniversary of F&D. The world has seen a staggering amount of change in the past seven decades.

So, with these two anniversaries in mind and with Dylan’s ode to changing times in the air, we focused our attention on the transformation of the global economy—looking back and looking ahead. We wanted to address the question, what will the global economy look like in another 70 years?

The Lessons of the North Atlantic Crisis for Economic Theory and Policy

Guest post by: Joseph E. Stiglitz
Columbia University, New York, and co-host of the Conference on Rethinking Macro Policy II: First Steps and Early Lessons

(Versions in 中文, Français, 日本語, and Русский)

In analyzing the most recent financial crisis, we can benefit somewhat 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 half of clear, detailed information on crisis after crisis, the burning question is not How did this happen? but How did we ignore that long history, and think that we had solved the problems with the business cycle? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris.

Rethinking Economic Principles: Join the Debate

By iMFdirect

The global financial crisis caused immense hardship and suffering all over the world. To prevent a repeat, we need to rethink…

… what we know about economic theory …. We need to rethink, following this, the policies … coming from the analytical work. And then we will need also to rethink multilateralism.

IMF Managing Director Dominique Strauss-Kahn (April 16, 2011)

A wholesale reexamination of macroeconomic principles in the wake of the crisis was the goal of a conference at the IMF in early March.

But, for Olivier Blanchard and others, the conference was merely “the beginning of a conversation, the beginning of an exploration.”

Here is our list of recommended reads to help you be part of the conversation.

A Balanced Debate About Reforming Macroeconomics

Guest post by Joseph E. Stiglitz, Columbia University, and
co-host of the Conference on Macro and Growth Policies in the Wake of the Crisis

The most remarkable aspect of the recent conference at the IMF was the broad consensus that the macroeconomic models that had been relied upon in the past and had informed major aspects of monetary and macro-policy had failed. They failed to predict the crisis; standard models even said bubbles couldn’t exist—markets were efficient. Even after the bubble broke, they said the effects would be contained. Even after it was clear that the effects were not “contained,” they provided limited guidance on how the economy should respond. Maintaining low and stable inflation did not ensure real economic stability. The crisis was “man-made.” While in standard models, shocks were exogenous, here, they were endogenous.

The Future of Macroeconomic Policy: Nine Tentative Conclusions

By Olivier Blanchard

(Version in Français, Español)

The global economic crisis taught us to question our most cherished beliefs about the way we conduct macroeconomic policy. Earlier I had put forward some ideas to help guide conversations as we reexamine these beliefs. I was heartened by the wide online debate and the excellent discussions at a conference on post-crisis macroeconomic policy here in Washington last week. At the end of the conference, I organized my concluding thoughts around nine points. Let me go through them and see whether you agree or not.

Rewriting the Macroeconomists’ Playbook in the Wake of the Crisis

By Olivier Blanchard

Before the global economic crisis, mainstream macroeconomists had largely converged on a framework for the conduct of macroeconomic policy. The framework was elegant, and conceptually simple. Caricaturing just a bit, it went like this:

• The essential goal of monetary policy was low and stable inflation. The best way to achieve it was to follow an interest rate rule. If designed right, the rule was not only credible, but delivered stable inflation and ensured that output was as close as it could be to its potential.

IMF Draws Lessons from the Crisis, Reviews Macro Policy Framework

As the crisis slowly recedes, the IMF has started to reassess the conduct of macroeconomic policy.

The Fund has just published a paper, “Rethinking Macroeconomic Policy,” part of a series of policy papers prepared by IMF staff reassessing the macroeconomic and financial policy framework in the wake of the devastating crisis. Several of the papers will be discussed at a conference to be held in Seoul, Korea, later this month.

IMF Survey magazine has interviewed the Fund’s Chief Economist Olivier Blanchard on the reason for the rethink. “It was tempting for macroeconomists and policymakers to take much of the credit for the steady decrease in cyclical fluctuations from the early 1980s on and to conclude that we knew how to conduct macroeconomic policy. We did not resist temptation. The crisis naturally forces us to question our earlier conclusions and that’s what we are trying to do in this paper,” he’s quoted as saying.

Paul Krugman dubbed the paper “interesting and important ” in his New York Times blog, while Richard Adams in the Guardian described it as a “break with years of economic orthodoxy” and a “stunning turnaround.”