Some people dismiss inequality and focus on overall growth—arguing that a rising tide lifts all boats. But when—as in the U.S. in recent decades—a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss. In fact, inequality matters. And it matters in all corners of the globe. Medical researchers ask how smoking, weight, and so on influence life expectancy. We wondered, what keeps long periods of high growth going? Somewhat to our surprise, income inequality stood out as a key driver. The upshot? It is a big mistake to separate analyses of growth and income distribution. A rising tide is still critical to lifting all the boats. But lifting up the lowest boats may actually help to keep the tide rising!
When the global financial system was thrown into crisis, many policymakers were shocked to discover a gaping hole in their policy toolkit. They have since made significant progress in developing macroprudential policy measures aimed at containing system-wide risks in the financial sector. Yet progress has been uneven. Greater efforts are needed to transform this policy patchwork into an effective crisis prevention toolkit. Given the enormous economic and human cost of the recent financial debacle, we cannot afford to miss this opportunity for substantial reform. We need further collective efforts to fill the policy black hole. It is our best chance of avoiding future crises.
The near collapse of the financial system that set off the global crisis was due in part to financial institutions suddenly lacking access to funding markets, and liquidity drying-up across securities markets. Financial institutions did not factor in how their own responses to a liquidity shortfall could make the entire system shut down. But, it only takes a few institutions to pull the plug on a liquidity-filled bathtub before it runs dry, and the central bank needs to open the spigots again. The key then is to make sure that firms have less incentive to pull the plug. To do that, in the latest Global Financial Stability Report, we have come up with a way to measure how much an individual financial institution contributes to system-wide liquidity risk.
Last month's conference at the IMF spurred plenty of discussion about the future of macroeconomic policies after the global financial crisis. Economic models, policy tools, and how they are applied need to catch up with changes in the global economic and financial system. You've heard here about views from the conference, but there's been plenty of discussion going on outside the IMF. Here's a snapshot....
The big blemish on South Africa’s otherwise strong economic performance since the mid-1990s is stubbornly high unemployment. Of course this is an important exception, especially as it has exacerbated income inequality. Unemployment in South Africa was already very high before the crisis, but the enormous job losses during 2008-09 made the already dire situation much worse. It now stands at some 24 percent—more than double the unemployment rate in the United States—and youth unemployment is phenomenally higher still at some 50 percent. Reducing unemployment is the foremost economic challenge facing South Africa. Here’s my take on what is needed.
There has been plenty of reflection, during the past few years, on the causes of the global financial crisis. But, last month’s conference at the IMF focused on taking what we’ve learned from the crisis and looking toward the future of economic policy. Nobel Prize winning economist, Robert Solow, was among those who brought interesting perspectives and a wealth of experience to the conference discussions. Listen to Professor Solow’s interview and what he has to say about the main challenges for policymakers today, and the future of monetary and fiscal policy.