Global crisis: thinking out of the box

The world appears to be suffering from 'crisis fatigue'. There's been so much talk over the past seven years and so little by way of results that policy-makers seem to have given up. Top economists, gathered in Philadelphia recently, proposed a clutch of stronger measures than austerity or monetary loosening, the Economist reports: 

Ms Reinhart and Mr Rogoff suggest debt write-downs and “financial repression”, meaning the use of a combination of moderate inflation and constraints on the flow of capital to reduce debt burdens…….

The Harvard professors were not the only economists who argued in Philadelphia that desperate times may call for desperate measures. Olivier Blanchard, chief economist at the International Monetary Fund, among others, mooted inflation as a means to provide monetary stimulus when interest rates are stuck near zero. Hans-Werner Sinn of the University of Munich reckoned that since Germans will not consent to the use of higher inflation to ease European rebalancing, several euro-area economies need to leave the single currency, at least temporarily. And Larry Summers of Harvard University acknowledged that higher inflation might propel the American economy out of “secular stagnation”, but suggested that an ambitious five-year programme of public investment would be better.

In short, a huge U-turn was in evidence amid the snow of Philadelphia. Before the crisis the talk among macroeconomists was all about the Great Moderation and the primacy of keeping inflation low. Now it is all about the Great Recession—and the possibility that a bit more inflation might just help.