Olivier Blanchard, currently chief economist at the IMF, gave a talk at Georgetown on Wednesday 3/24. So, of course, I went to see him, since occasionally listening to awesome people talk is one of the fringe benefits of being a Georgetown student. His talk was titled “Rethinking Macroeconomic Policy”, which as interesting to me because I rarely even think about macroeconomic policy, let alone rethink it. I’m going to summarize what I found most interesting and prescient in what he said.
Blanchard noted that monetary policy in the past has focused on one target and one instrument. He said that, in the future, monetary policy should instead have many targets and many instruments. His reasoning was that, while in this past crisis there was a housing boom, there wasn’t an overall boom, so raising the federal funds rate may have slowed the housing sector, but it would have hurt other sectors. He also said that the future of central banks should be that they are 1) transparent about objectives, and 2) flexible as to their instruments.
Another thing I really like was an example of what Blanchard called a “schizophrenia” in economic thinking. When economists discuss fiscal policy, there is usually mention of automatic stabilizers, and how they are better than active policies because of the time lag of the political process. But, Blanchard noted, there is no talk about how to design better automatic stabilizers. It’s like the progressive tax system and social services, exactly the way they exist now, just so happen to be optimal as automatic stabilizers. I think this is a really good point — from first-hand experience, I can vouch that Greg Mankiw’s favorite textbook glosses over automatic stabilizers in this exact way.
Blanchard’s thoughts seem to be consistent with my view that economics should become more of an engineering discipline than it currently is.