An excellent report on the current thinking (hfk)
Posted on May 1, 2015 by iMFdirect
By Olivier Blanchard
On April 15-16, the IMF organized the third conference on “Rethinking Macro Policy.”
Here are my personal take aways.
1. What will be the “new normal”?
I had asked the panelists to concentrate not on current policy challenges, but on challenges in the “new normal.” I had implicitly assumed that this new normal would be very much like the old normal, one of decent growth and positive equilibrium interest rates. The assumption was challenged at the conference.
On the one hand, Ken Rogoff argued that what we were in the adjustment phase of the “debt supercycle.” Such financial cycles, he argued, end up with debt overhang, which in turn slows down the recovery and requires low interest rates for some time to maintain sufficient demand. Under that view, while it may take a while for the overhang to go away, more so in the Euro zone than in the United States, we should eventually return to something like the old normal.
On the other hand, Larry Summers argued that, while debt overhang was clearly relevant, more was going on. He expanded on his secular stagnation hypothesis, arguing that, in the context of a chronic excess of saving over investment, keeping the economy at potential may well require very low or even negative real interest rates. He pointed out that real interest rates had started declining long before the crisis, and pointed also to the further decline in long rates since he first stated this hypothesis at an IMF conference last year. If he is right, the new normal will not be like the old normal. Den Rest des Beitrags lesen »