Which Way the Wind Blows

Jeff Hayden altBy 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?

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

Joseph_E._StiglitzGuest 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.

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Rethinking Economic Principles: Join the Debate

The global financial crisis caused 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 Straus-Kahn (April, 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

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 and they provided limited guidance on how the economy should respond. There was also remarkable consensus about many elements of policy in responding to the crisis, and there were even large areas of policy consensus for the longer run. In short, the conference made an important contribution in invigorating a balanced debate about reforming macroeconomics.

The Future of Macroeconomic Policy: Nine Tentative Conclusions

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

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, and it seemed to work. From the early 1980s on, macroeconomic fluctuations were increasingly muted, and the period became known as the “Great Moderation”. Then the crisis came. If nothing else, it forces us to do a wholesale reexamination of those principles. This raises questions that will keep us busy for years to come. To start exploring the answers, David Romer, Michael Spence, Joseph Stiglitz, and I have organized a conference at the IMF on March 7-8. Here are some ideas to get the conversation started.

IMF Draws Lessons from the Crisis, Reviews Macro Policy Framework

The release of a paper by the IMF called "Rethinking Macroeconomic Policy" has attracted instant reaction and a lot of comment. Paul Krugman supported the idea of targeting higher average inflation, but said he was surprised that the Fund was allowing him to say so publicly. Others said inflation was not the solution.

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