Sunday, September 13, 2009

Chief IMF economist calls for careful approach to recovery

Financial Times: IMF warns on ending fiscal stimulus
IMF: Sustaining a global recovery
New York Times: IMF revises up 2010 world GDP forecast

IMF economists are confident that a global recovery has begun. Sustaining that recovery however, will require careful monetary policy and spending choices in countries across the world. In a recent IMF report, chief economist Olivier Blanchard described the unique problems facing economic strategists in the aftermath of severe crisis.

Blanchard argues that just as the United States was the source of the crisis, a healed U.S. economy will be the key to global recovery. He fears that without an increase in external demand to the United States, stimulus measures could carry on for too long and increase the United States’ already significant debt burden. If fiscal deficits are maintained for too long, the stability of the dollar could be called into question, resulting in capital flows out of the U.S. and a potential depreciation of the dollar. Dollar depreciation may not be independently problematic, but if it occurs suddenly, or in a disorderly fashion, it could undermine the recovery by creating uncertainty and market instability. Alternately, Blanchard warns that negative consequences could result from cutting off stimulus funds too soon. The stimulus funds provide the liquidity that makes recovery possible. Allowing the funds to dry up too soon could compromise resurgent growth.

Emerging economies, after feeling the sting of reduced capital flows during the crisis, could be crucial to the U.S. recovery. If private U.S. domestic demand remains weak, the U.S. must hope for an boost in net exports, in order to keep pace with production. Emerging economies that still possess account surpluses, like China, could greatly improve the balance by boosting import demand. Sustained recovery in both developed and emerging economies will also require a rebalancing from public to private spending. Blanchard calls for international cooperation in efforts to sustain the current, “nascent” recovery.

1. There are significant downsides to both prolonging stimulus measures too long and to cutting off stimulus funds too early. Is one alternative worse than the other? Should developed economies err on the side of providing too much stimulus funding or too little?
2. Which other emerging economies have weathered the crisis and surfaced with account surpluses? Are they, like China, in position to aid the U.S. recovery through increased import demand?

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