In an influential piece co-authored by Maurice Obstfeld, the IMF’s current chief economist, the Fund offers its latest reflections on ‘macroeconomic management’. It notes that globally ‘policy space is constrained’, that is, both monetary and fiscal policy tools lack ‘the power to raise growth or deal with the next negative shock’. Why? Monetary policy is subject to the ‘lower bound’ on policy interest rates. This means that the ‘room to loosen monetary conditions further is limited’. At the same time, ‘many countries have withdrawn fiscal stimulus out of concern for high and rising public debt’? What should one do in such circumstances?
The authors suggest a ‘comprehensive, consistent and coordinated approach to economic policy’. This is an attempt on their part to impart analytical substance to the proclamation by the IMF’s Christine Lagarde in April 2016 that one need a three-prong policy approach. Hence, the three ‘Cs’.
Comprehensive policy actions mean encompassing monetary, fiscal and structural policies. Short-term demand-management policies should be used to support growth-promoting long-term structural reforms and vice versa. Consistency means a continuing commitment to providing nominal anchors for long-term expectations that will guide the private sector in its spending and saving decisions. The two ‘Cs’ should then be complemented by international policy coordination.
Much of what is being said here is not new. The notion of three elements of a holistic policy framework – monetary, fiscal and structural – has been part of global policy discourse and numerous G-20 pronouncements at least since the Toronto Summit of 2010. Most importantly, the latest rendition of the IMF’s prescriptions on macroeconomic policy appear to suffer from an advanced country bias. The paper offers case studies from two advanced countries (Canada and Japan). Only a paragraph is devoted to the case of ‘emerging economies’. The authors simply claim that the insights they offer are ‘relevant for emerging economies as well’.
Well, one needs more than a paragraph to argue how, and in what circumstances, the current treatise on macroeconomic policy is applicable to the developing world. It is doubtful, for example, that the typical developing country suffers from a lower bound on policy interest rates or that, unlike the 1980s or even 1990s, sovereign debt crisis is a widespread phenomenon in the developing world. More importantly, key challenges pertaining to poverty reduction, climate change and structural transformation need to be addressed. Will the three ‘Cs’ be both necessary and sufficient in addressing these challenges?