Friday, September 14, 2012
From the recent global economic crisis emerge some old lessons, some new lessons and a lot of questions for macroeconomic policy makers. By 2007 complacency had sunk in around the world. It all seemed quite simple. The theory but not the practice of running balanced fiscal policy was widely accepted. Maintaining low and stable inflation was thought to be the cure for wild economic cycles. But then the worst economic cycle since the Great Depression hit. What went wrong and what are the lessons? The first lesson is that keeping inflation low may still be a necessary condition for good economic performance but it is certainly not sufficient. Second, fiscal imbalances are more problematic and more difficult to recover from than previously believed. So even greater effort must be applied to align practice with theory. Many would say a third lesson is that greater international policy co-ordination is needed. But how far should sovereign countries go in ceding their policy authority to international bodies? And can we be confident the co-ordinators will know what they are doing?