IMF Explores Contours of Future Macroeconomic Policy

Olivier Blanchard, one of the authors of a paper, “Rethinking Macroeconomic Policy,” has been interviewed:

On main findings:

The basic elements of the pre-crisis policy consensus still hold. Keeping output close to potential and inflation low and stable should be the two targets of policy. And controlling inflation remains the primary responsibility of the central bank. But the crisis forces us to think about how these targets can be achieved.

The crisis has made clear, however, that policymakers have to watch many other variables, including the composition of output, the behavior of asset prices, and the leverage of the different participants in the economy. It has also shown that they have potentially many more instruments at their disposal than they used before the crisis. The challenge is to learn how to use these instruments in the best way. The combination of traditional monetary policy and regulatory tools, and the design of better automatic stabilizers for fiscal policy, are two promising routes.

On the role of exchange rates:

Blanchard: In many emerging market countries, while monetary authorities describe themselves as inflation targeters, they clearly care about the exchange rate beyond its effect on inflation.

They probably have good reasons to do so. Isn’t it time to reconcile practice with theory, and to think of monetary policy more broadly, as the joint use of the interest rate and sterilized intervention, to protect inflation targets while reducing the costs associated with excessive exchange rate volatility?