After averting a second Great Depression, what should policy makers do to foster recovery?
Economic policymakers are rarely popular. Central bank governors are notorious for removing the punch bowl at the party. Ministers of finance are traditionally the ones who say no to their colleagues’ pet spending projects.
In the upside-down world of recent months, finance ministers and central bank governors around the world seemed to have switched sides. They became cheerleaders for expansionary policies. The IMF has argued strongly for this, as long as countries had room to take on more debt. Despite some hiccups, it seems clearer with every economic release that the extraordinary actions governments have taken have paid off, at least in halting the slide. Economic prospects may not be quite as bright as recent market moves would suggest. But the risk of spreading financial collapse has lessened markedly.
Cooperation among the world’s leading economies has been crucial to this success. IMF estimates showed that up to one-third of the boost to global growth expected from fiscal stimulus will reflect positive spillover effects. This reflects a kind of virtuous circle—with policy stimulus in one country helping growth in another, and so on—that is the opposite of the dire policies that spread misery during the Depression era. Policymakers showed they had learned the lessons of the 1930s.
Fiscal stimulus, cuts in interest rates, and steps to repair financial systems are working.
So far so good. Economists widely called for these extraordinary measures, helping the profession to redeem its poor record in the runup to the crisis. But the question now is how to generate—and then foster—a strong and sustainable recovery. And the answers there are less clear—or at least there is less consensus.
When and how should monetary stimulus be unwound? How should governments and central banks adapt their unprecedented support to the financial system, as fears of collapse ebb, but uncertainties about future loan losses remain? How should short-term needs for fiscal support to demand be balanced against looming deficits in the medium term in some countries?
What does seem clear is that as countries grapple with these choices, cooperation among them will remain crucial. Restoring sustainable growth will require a rebalancing act as well that complementary policies in different countries need to support.
As far as financial reforms go, cooperation is also critical. As the GFSR update last month noted, “maintaining consistency of policies across countries [is needed] to minimize the opportunities for regulatory arbitrage and adverse financial flows.” Within countries there is already a challenge, given the range of authorities and varying mandates involved. Across countries, the challenge of coherence and consistency is greater, but the stakes even higher.
Work at the IMF on these issues is under way. We will be sharing our analysis in coming weeks.