Progress and Confusion: The State of Macroeconomic Policy

336 Pages·2016·2.91 MB·English

by  Olivier Blanchard

Progress and Confusion
The State of Macroeconomic Policy
edited by Olivier Blanchard, Raghuram Rajan, Kenneth Rogoff, and Lawrence
H. Summers

The MIT Press
Cambridge, Massachusetts
London, England
© 2016 International Monetary Fund and Massachusetts Institute of Technology
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Library of Congress Cataloging-in-Publication Data
Names: Blanchard, Olivier (Olivier J.) editor.
Title: Progress and confusion : the state of macroeconomic policy / Blanchard, Olivier, Raghuram Rajan,
Kenneth Rogoff, and Lawrence H. Summers, eds.
Description: Cambridge, MA : The MIT Press, 2016. | Includes bibliographical references and index.
Identifiers: LCCN 2015039939 | ISBN 9780262034623 (hardcover : alk. paper)
eISBN 9780262333436
Subjects: LCSH: Monetary policy. | Fiscal policy. | Economic policy. | Macroeconomics.
Classification: LCC HG230.3 .P76 2016 | DDC 339.5—dc23 LC record available at
http://lccn.loc.gov/2015039939
10 9 8 7 6 5 4 3 2 1
Table of Contents
1. Title page
2. Copyright page
3. 1 A Road Map to “Progress and Confusion”
4. The “New Normal”
1. 2 Debt Supercycle, Not Secular Stagnation
2. 3 Rethinking Secular Stagnation after Seventeen Months
5. Systemic Risk and Financial Regulation
1. 4 A Note from the Session on Systemic Risk and Financial
Regulation
2. 5 A Comparative Analysis of Financial Sector Health in the United
States, Europe, and Asia
3. 6 Rethinking Financial Regulation: How Confusion Has Prevented
Progress
4. 7 Systemic Risk and Financial Regulation: Where Do We Stand?
5. 8 Shadow Banking as a Source of Systemic Risk
6. Macroprudential Policies: Gathering Evidence
1. 9 Macroprudential Policy Regimes: Definition and Institutional
Implications
2. 10 Macroprudential Tools, Their Limits, and Their Connection with
Monetary Policy
3. 11 A Simple Cost-Benefit Analysis of Using Monetary Policy for
Financial Stability Purposes
7. Monetary Policy in the Future
1. 12 Introduction to the Monetary Policy Section
2. 13 Monetary Policy in the Future
3. 14 A Monetary Policy for the Future
4. 15 The Credit Surface and Monetary Policy
5. 16 Remarks on the Future of Monetary Policy
8. Fiscal Policy in the Future
1. 17 Fiscal Policy for the Twenty-First Century: Testing the Limits of
the Tax State?
2. 18 The Future of Fiscal Policy
3. 19 What Future for Rules-Based Fiscal Policy?
4. 20 On the Proper Size of the Public Sector and the Level of Public
Debt in the Twenty-First Century
9. Capital Flows, Exchange Rate Management, and Capital Controls
1. 21 Floating Exchange Rates, Self-Oriented Policies, and Limits to
Economic Integration
2. 22 Some Lessons of the Global Financial Crisis from an EME and a
Brazilian Perspective
3. 23 Capital Inflows, Exchange Rate Management, and Capital
Controls
10. The International Monetary and Financial System
1. 24 The International Monetary and Financial System: Eliminating
the Blind Spot
2. 25 Prospects and Challenges for Financial and Macroeconomic
Policy Coordination
3. 26 Global Safe Asset Shortage: The Role of Central Banks
4. 27 Going Bust for Growth
11. Conclusion
1. 28 Rethinking Macro Policy: Progress or Confusion?
12. List of Contributors
13. Index
List of Tables

1. Table 3.1 Ten-Year Interest Rates, April 2015 and November 2013 (Initial
IMF Speech on Secular Stagnation)
2. Table 3.2 Real Rates, 2020–2025 (%)
3. Table 3.3 Breakeven Ten-Year Inflation (%)
4. Table 5.1 Decomposition of Change in SRISK
5. Table 5A.1 Number of Total Firms per Region
6. Table 10.1 Correlation of Policy Changes in Asia-Pacific Economies
7. Table 11.1 Costs and Benefit in Unemployment of a One-Percentage-Point
Higher Policy Rate during four quarters
8. Table 27.1 Growth in Real GDP per Capita, Advanced Economies, 1996–
2014
List of Illustrations

1. Figure 3.1 Changes to Medium-Term GDP Forecast since October 2013,
Five-Year Effects. Source: IMF, World Economic Outlook, October 2013
and April 2015.
2. Figure 3.2 TIP Real Wages Have Fallen Steadily. US TIPS Ten-Year Real
Yield. Source: Bloomberg.
3. Figure 3.3 Along with Rates in the Rest of World. Rest of World Real Rate.
Note: 10 Year Yield – 5 Year Prior Inflation, weighted by PPP GDP.
Source: Bloomberg, IMF.
4. Figure 5.1 SRISK Normalized by GDP Comparison. Notes: This figure
plots the sum of SRISK for publicly traded financial firms (see inclusion
criteria in the appendix to this chapter) in a given week, scaled by the
country’s (or sum of the countries’) latest GDP figure available that week,
for the United States, China, Asia (including China), and Europe. The
SRISK data are from the NYU Stern Volatility Lab
(http://vlab.stern.nyu.edu/welcome/risk) from January 1, 2007, until end of
September 2014. The country GDP data are from Bloomberg.
5. Figure 5.2 Aggregate Leverage Comparison. Notes: This figure plots the
aggregate (quasi-) leverage for publicly traded financial firms (see the
inclusion criteria in the appendix to this chapter) for the United States,
China, Asia (including China), and Europe. Quasi-leverage of a financial
firm is its quasi-market assets (market value of equity + book value of
nonequity liabilities) divided by the market value of equity. Quasi-leverage
of financial firms in a region is weighted by the market value of equity of
financial firms to obtain the aggregate quasi-leverage. The leverage data are
from the NYU Stern Volatility Lab (http://vlab.stern.nyu.edu/welcome/risk)
from January 1, 2007, until end of September 2014.
6. Figure 5.3 Global Systemic Risk by Country: Europe. Notes: This figure
plots the top twenty country-level values in Europe of the sum of SRISK in
USD billion for publicly traded financial firms (see inclusion criteria in the
appendix to this chapter) in a country as of October 10, 2014. The SRISK
data are from the NYU Stern Volatility Lab
(http://vlab.stern.nyu.edu/welcome/risk).
7. Figure 5.4 European SRISK Normalized by GDP. Notes: This figure plots
the top twenty country-level values in Europe of the sum of SRISK for
publicly traded financial firms (see inclusion criteria in the appendix to this
chapter) in a country, scaled by the country’s latest GDP figure available as
of October 10, 2014. The SRISK data are from the NYU Stern Volatility
Lab (http://vlab.stern.nyu.edu/welcome/risk). The country GDP data are
from Bloomberg.
8. Figure 5.5 Global Systemic Risk by Country: Asia. Notes: This figure plots
the top thirteen country-level values in Asia (including Australia and New
Zealand) of the sum of SRISK in USD billion for publicly traded financial
firms (see inclusion criteria in the appendix to this chapter) in a country as
of October 10, 2014. The SRISK data are from the NYU Stern Volatility
Lab (http://vlab.stern.nyu.edu/welcome/risk).
9. Figure 5.6 Asia SRISK Normalized by GDP. Notes: This figure plots the top
eleven country-level values in Asia (including Australia and New Zealand)
of the sum of SRISK for publicly traded financial firms (see inclusion
criteria in the appendix to this chapter) in a country, scaled by the country’s
latest GDP figure available as of October 10, 2014. The SRISK data are
from the NYU Stern Volatility Lab
(http://vlab.stern.nyu.edu/welcome/risk). The country GDP data are from
Bloomberg.
10. Figure 10.1 Comparison of Macroprudential Policy with Monetary Policy.
11. Figure 10.2 Policy Rates Compared to Taylor Rules. Notes: See Boris
Hofmann and Bilyana Bogdanova, “Taylor Rules and Monetary Policy: A
Global ‘Great Deviation’?,” BIS Quarterly Review, September 2012, 37–49,
http://www.bis.org/publ/qtrpdf/r_qt1209f.pdf. Sources: IMF, International
Financial Statistics and World Economic Outlook; Bloomberg; CEIC;
Consensus Economics; Datastream; national data; authors’ calculations.
12. Figure 10.3 Duration of Assets and Liabilities of European Insurance
Companies. Source: European Insurance and Occupational Pensions
Authority (EIOPA).
13. Figure 15.1 Two-Dimensional Credit Surface.
14. Figure 15.2 One-Dimensional Credit Surface.
15. Figure 15.3 Mortgage Bond Leverage Cycle. Note: The chart represents the
average total repo loan as a percentage of asset value available from dealers
on a hypothetical portfolio of CMOs originally rated AAA, subject to
certain adjustments noted below. The price time series of imputed Alt-A
floater prices is based on the Alt-A price drop versus agency collateral time
series available from Barclays.  The portfolio evolved over time, and
changes in average margin reflect changes in composition as well as
changes in margins of particular securities. In the period following August
2008, a substantial part of the increase in margins is due to bonds that could
no longer be used as collateral after being downgraded, or for other reasons,
and hence count as 100 percent margin.
16. Figure 15.4 Change in Origination Volumes, 2006 versus 2013.
17. Figure 17.1 Unexpected Increase in General Government Debt in Selected
Countries (2007–2010, percent of 2010 GDP). Note: PPP-GDP weighted
average across ten countries with largest increase in general government
gross debt–to-GDP ratio during 2007–2010. Includes France, Germany,
Greece, Iceland, Ireland, Netherlands, Spain, Portugal, UK, and the United
States. Source: International Monetary Fund, “Fiscal Transparency,
Accountability, and Risk,” IMF Policy Paper, Washington, DC, 2012.
18. Figure 17.2 Forecast Error for General Government Debt (actual minus
forecast for year t + 2, 2001–2013 average as percent of GDP). Note: The
chart presents annual forecast errors averaged between 2001 and 2013.
Forecast errors are calculated as the actual outcome for debt-to-GDP ratio
minus the forecast for the debt-to-GDP ratio prepared two years earlier.
Includes all EU member-states except Croatia because of data availability.
Sources: EU Stability and Convergence Programmes; IMF staff estimates.
19. Figure 17.3 Distribution of Fiscal Stabilization Coefficients. Note:
“Significant” is defined as a coefficient with a P value less than 0.10.
Source: IMF, Fiscal Monitor, “Now is the Time: Fiscal Policies for
Sustainable Growth,” April 2015.
20. Figure 17.4 Selected Fiscal Stabilization Coefficients (FISCO). Note:
“Significant” is defined as a coefficient with a P value less than 0.10.
Source: IMF, Fiscal Monitor, “Now is the Time: Fiscal Policies for
Sustainable Growth,” April 2015.
21. Figure 17.5 Advanced Economies: FISCO, Output Volatility and Real GDP
Growth, 1980–2013. Note: Output volatility is defined as the standard
deviation of the real GDP growth rate over the sample period. Source: IMF,
Fiscal Monitor, “Now Is the Time: Fiscal Policies for Sustainable Growth,”
April 2015.
22. Figure 17.6 Asymmetric Stabilization: Unpleasant Public Debt Arithmetic
(percent of GDP). Note: The simulations are based on the stock flow
identity between debt and the overall balance. Other assumptions are
nominal potential growth of 4 percent, an automatic stabilization coefficient
of 0.5, an implicit interest rate on public debt of 5 percent, and symmetric
cycles, with the output gap smoothly oscillating between −2 and 2 percent.
No fiscal adjustment is built into the scenario. The t denotes the initial year
of the simulation. Source: IMF staff estimates.
23. Figure 20.1 Ten-year Constant Maturity U.S. Treasury Nominal Rate.
Source: Federal Reserve Economic Data, Federal Reserve Bank of St.
Louis.
24. Figure 20.2 Economic Growth and Interest Rates Have Become More
Closely Aligned. Source: Center on Budget and Policy Priorities,
CBPP.org.
25. Figure 22.1 The Impossible Trinity, and Instruments and Policies to
Manage It.
26. Figure 22.2 Macroeconomic Stability (Activity/Inflation and Financial).
27. Figure 24.1 Global credit in US dollars and euros to the nonfinancial sector.
Notes: a. At constant end-Q3 2014 exchange rates. b. Credit to the
nonfinancial sector in the United States/euro area from financial accounts,
excluding identified credit to borrowers in nondomestic currencies (i.e.,
cross-border and locally extended loans and outstanding international bonds
in nondomestic currencies). c. Cross-border and locally extended loans to
nonbanks outside the United States/euro area. For China, locally extended
loans are derived from national data on total local lending in foreign
currencies on the assumption that 80 percent are denominated in US dollars.
For other non-BIS reporting countries, local US dollar/euro loans to
nonbanks are proxied by all BIS reporting banks’ gross cross-border US
dollar/euro loans to banks in the country, on the assumption that these funds
are then extended to nonbanks. Sources: IMF, International Financial
Statistics; Datastream; BIS international debt statistics and locational
banking statistics by residence.
28. Figure 24.2 Official Holdings of US Treasury Securities (in trillions of US
dollars).* Notes: *Different valuation methods based on source availability.
a. Covers the euro area, Japan, the United Kingdom and the United States;
for the euro area, Japan and the United Kingdom, converted into US dollars
using Q2 2015 constant exchange rates. b. For the United States, total