New World Bank Publication Discusses The Future Of Economic Policy

From the World Bank blog (excerpts):

The Day After Tomorrow: Macro-Financial Policy Catches Up With Reality

The 2008–09 crisis opened the door to a different kind of thinking in international macroeconomics—and closed it on some of the previous orthodoxy. Let’s take a look at some of the most obvious cases.

First, some now see a bit of inflation (perhaps as high as 5 percent per year) as desirable for countries that pursue inflation targets, because it would allow more space to reduce nominal interest rates when an economy falls in recession. In fact, what to target (e.g., consumer, producer, asset, housing, or other prices) is the question.

Second, regulatory parameters and practices in the financial sector have proved to be more critical for real growth than we previously thought, whether through systemic risk, over-lending, costly bailouts, or other channels. Floating exchange rate regimes are falling out of favor, since “managed” ones proved to be better at controlling inflation and reducing sudden, unnecessary fluctuations. Controls on the movement of capital across boundaries have become an acceptable tool (they used to be heretical), almost the price to pay for policy success.

Third, multilateral surveillance is in the cards, initially through the G-20, since the actions of hard-hit, over indebted rich countries cause volatility in many emerging markets. But fiscal policy advice is bifurcated—between a short-term need for sustained stimulus and a medium-term need for consolidation, and between massive deficits in the developed world and the accumulation of surpluses in sovereign funds in the developing one.

From all this, a new paradigm is likely to rise…

…The bottom line is that the search for financial stability, through regulatory or macroeconomic policy, is just beginning. This is putting developing countries in a bind. Should they wait for new global standards to emerge, or should they tailor their own regulatory strategies? Stay tuned.

This is a nice precis of the current debate on macro-policy and regulation, especially as it pertains to developing countries. Truth to tell, the essential hurdle that has to be overcome is that many of the proposed remedies simply haven’t been tried – or tried long enough – to judge how effective they might be.

And there’s always the potential problem that any new rules or regulations might themselves be the source of future crises and instabilities – as the saying goes, generals are always fighting the last war. But this blog post is a pretty good summation of the state of the debate on macro across the globe.

Technical Notes:

Canuto, Otaviano & Marcelo Guigale, Eds, "The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World", The World Bank, 2010 (direct download link here).