Olivier Blanchard says that, at the recent IMF conference, Rethinking Macro Policy II: First Steps and Early Lessons, they don't know the consequences of what they're doing, but don't expect them to just stand there:
Rethinking and reforms are both taking place. But we still do not know the final destination, be it for the redefinition of monetary policy, or the contours of financial regulation, or the role of macroprudential tools. We have a general sense of direction, but we are largely navigating by sight.But we're waiting for our new eyeglass prescription? Don't expect to let that stop us;
...we are still unsure about the right role of securitisation, the right scope for derivatives, the role of markets versus banks, and the role of shadow banking versus banking.
Still, we all agree that some things should change, and indeed policymakers are putting in place measures in the context of international or national initiatives.Even though the economics is far from settled;
I am struck by the level of uncertainty and disagreement about the effects of capital ratios on funding costs, and thus on lending.And we are still working out the kinks;
...macroeconomic thinking understated the role of financial factors in economic fluctuations. Much analytical work has taken place over the past five years to reintroduce the financial system in our models. But we are not there yet.The world is our oyster;
The intellectually pleasant position is to argue that macroprudential tools will take care of financial stability....We've learned from the past;
It was clear that the two standard tools, fiscal and monetary policy, were not the right ones to deal with financial imbalances and risks. ....We do not have the answer yet. But as more and more countries are using those tools, we are learning.That's supposed to be comforting?
I draw two lessons from the evidence, and from the presentations at the conference:Meanwhile, it's almost summertime, and the livin' is easy, the fish will probably still be bitin'. Then there's that Sumner character and his sidekicks, to think about, mustn't forget them;
I read, perhaps unfairly, Michael Woodford’s ... discussion at this conference to suggest that the crisis should lead us to shift from inflation targeting to nominal income targeting, without a major emphasis on financial stability. I am sceptical that this is the right answer. I think we have to be realistic about the role that macroprudential tools can play, and that monetary policy cannot ignore financial stability.Well, that's that!