Saturday 20 Apr 2019 | 13:52 | SYDNEY
Saturday 20 Apr 2019 | 13:52 | SYDNEY

A wind change in the global economy


Mark Thirlwell

17 March 2010 12:47

I've posted a few times about how the world economy is changing in response to the rise of new economic powers and in the aftermath of the GFC. 

One nice bit of evidence for these shifts is the radical rethinking that appears to have been underway at the IMF over recent months. In quick succession, the Fund has shown signs of changing its position on capital controls, on exchange rates, and on the appropriate target rate of inflation. Steve Grenville has had fun tracking these changes here on The Interpreter.

Now, one obvious interpretation of what's going on is that the Fund has simply learned new lessons from the GFC and other recent economic developments and is responding accordingly. And that's surely most of the story. 

But (and call me cynical if you like), I suspect there might be just a bit more to it than that. I think the IMF is also implicitly recognising the changing balance of economic and hence political power in the world. With new and important players such as China holding very different views on exchange rate policy and capital controls than the previous Fund orthodoxy, it makes sense for the Fund to trim its sails to the new prevailing winds. 

After all, the Fund has repeatedly failed to convince Beijing on exchange rate policy, for example. So perhaps there's an element of 'if you can't beat them, join them' here as well.

What about the mooted increase in inflation targets? Again, this is basically a response to problems faced by policymakers in the US and UK, where monetary policy has run into the zero bound. Raising the inflation target would reduce the frequency with which that happens. 

Put my cynical hat back on for a moment, however, and I can easily come up with an argument as to why this too could be seen as an indication of changing political as well as economic realities. The big increase in government debt stocks in the developed world make a somewhat higher level of inflation look quite attractive to several governments (see for example this piece by John Lanchester on the British economy). 

But a major obstacle to higher inflation in some of these countries is those formal inflation targets. So from the point of view of the politicians, it might be handy if someone could come up with a credible reason for a higher inflation target that didn't spook the bond markets...

Photo by Flickr user batintherain, used under a Creative Commons license.