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Friday, 27 May 2016

Managing Complexity—Economic Policy Cooperation After the Crisis

G. Russell Kincaid (St. Antony’s College, Oxford)

Speakers: Tamim Bayoumi, Deputy Director, International Monetary Fund (IMF); Fred Bergsten, Senior Fellow and Director Emeritus, Peterson Institute for International Economics; Heidi Crebo-Rediker, Senior Fellow, Council on Foreign Relations; and Vitor Gaspar, Director Fiscal Affairs Department, IMF

Moderator: Kemal Dervis, Vice President and Director, Global Economy and Development, The Brookings Institution

According to Mr. Bayoumi, this new book adopts a Cubist Approach to analyzing economic policy cooperation. Like the art school, the 12 chapters in Managing Complexity—authored by various academics and practitioners, including two current PEFM Associates—do not depict the subject from a single vantage point, but provides multitude perspectives to picture all the intricacies. This event, was held at the Brookings Institution in Washington DC on May 16, followed similar presentations earlier in 2016 at Chatham House and in Shenzhen, China at a conference on global financial governance. The book’s main thesis rebuffs the “benign neglect” approach to policy cooperation owing to new challenges posed by interlinked financial stability and the “new normal” economic environment.

Fred Bergsten endorsed strongly the message that the benefits from policy cooperation are far greater in tough times—a point made in the chapter by David Vines—seeing a need to ensure that cooperation frameworks are in place and ready to respond promptly—like fire fighters. He added that having more policy issues on the table helps by opening up more trade-offs and allowing more avenues to a successful conclusion. He stressed the importance of inclusiveness—having all the policy actors at the table, in particular emerging market economies such as China. 

Continuing the latter point, Ms. Crebo-Rediker emphasized the complex interactions from spillovers and spillbacks especially from capital flows, resulting from our ever more multi-polar global economy. In this connection, she recommended the four chapters on policy responses to the crisis. She highlighted the important cautionary lessons in the chapter on the euro-area responses, which was accurately subtitled “A Case of Too Little, Too Late” written by an insider, Fabrizio Saccomanni.

Vitor Gaspar elaborated upon another theme—the need to improve domestic policy cooperation especially amongst fiscal, monetary, and macroprudential tools as necessary condition underpinning more effective international policy cooperation. Fiscal policy must play a more active role once monetary policy hits the zero lower bound, while macroprudential tools must help monetary policy avoid boom-bust cycles in asset prices. Gains from international policy coordination can be large given the risks from financial linkages and leakages. Macroprudential instruments can help make up for the loss of monetary policy tools under fixed exchange rates (such as in the euro area), but only if coordinated to address arbitrage activities as stressed in the chapter by Kincaid and Watson.

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