Tuesday, February 23, 2010

IMF rethinks macro policy - revolutionary!

What a difference a personality makes on global policy making!

For sixty plus years IMF was dead against capital controls and was painfully orthodox on low inflation (the lower, the better, around 2%). Still in July 2007 the former IMF Managing Director, Rodrigo de Rato was quoted saying that capital controls were "rapidly becoming ineffective" and were easily circumvented.

Now, in just two years, the new MD Dominique Strauss-Kahn has changed the IMF beyond recognition. Capital controls are back, countercyclical fiscal policy is de rigeur, printing money (so called quantitative easing) is OK, and slightly higher inflation than the 2% dogma is not necessarily bad. Just read this by Olivier Blanchard, IMF Chief Economist (original paper.) as well as this this paper on the benefits of capital controls and this one on lessons and policy implications from the global financial crisis.

The same people (and I know what I am saying - I have worked at the IMF myself) who proselitized the dogma for all their careers suddenly change their view 180 percent. Have they been persuaded by the crisis that new policies were needed or have they simply been lying to themselves most of the lives for the convenience of a cushy IMF job?

I challenge all those who say that personalities don't matter!

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