The Money View

Navigating the Turning Point

From MIT to IMF

By the evidence of the recent IMF conference, there is apparently now consensus that the global financial crisis has killed--“shattered” (David Romer), “destroyed” (Stiglitz)--pre-crisis academic economic orthodoxy. But that orthodoxy had many dimensions, and there is no consensus on where repair efforts are most immediately necessary.

Instead, we see a division of labor emerging in which everyone focuses on that one dimension where they feel themselves to have some special expertise. In such a situation, an overall map may be helpful for making sense of the reconstruction effort as a whole.

The map reveals five tectonic shifts:

1) Shift from academia to practitioners (both public and private)
2) Shift from the North to the South
3) Shift from market to state
4) Shift from national to international
5) Shift from specialists to systems thinkers

Five is too many to remember, hence my proposed summary slogan, “shift from MIT to IMF”. (That means we should pay particular attention to the opening remarks of Dominique Strauss-Kahn and the luncheon speech of John Lipsky, which frame the entire event.)

Pre-crisis academic orthodoxy was organized around the DSGE model and its variants, which suggested a minimal role for macroeconomic management, more or less limited to monetary policy at the level of the nation-state. The economies of the North were farther along the path of adopting this advice than were the economies of the South, but the trend of history seemed clear; the South would be following the North in due time. As each country achieved monetary stability, market forces were sure to deliver price stability, output stability, and financial stability at the level of the country itself. And as more individual countries achieved stability, international stability (including exchange rate stability) was sure to follow.

The death of pre-crisis orthodoxy is thus more than the death of a model; it is the death of an entire road map for history.

Which raises the central question, How can we steer a course if we have lost sight of the destination? By their own admission, academics have little to offer practitioners, the North has little to offer the South. And yet, by the evidence of the conference, policy makers seem less disoriented than academics; they have plenty of problems immediately in front of them to keep them occupied. Also, the South is less disoriented than the North; they were less far along the road than the North, and also have remaining sources of indigenous resistance that provide genetic reserves of intellectual diversity.

It won’t last. The globalization engine that has pulled economic growth for the last decade needs a guiding metaphor at the top to orchestrate its complex adaptive operations further down. New economic thinking is the order of the day. For my money, the road forward is best presaged by the presentations of Hyun Song Shin (Session III, 43:20) and Olivier Jeanne (Session VI, 20:15). Check ‘em out. 




A map of current turnings

Pre-Crisis Orthodoxy                                                                     Post-crisis Rebalancing

From academia to practitioners:

Economics is enough

Political economy

Abstract beauty is enough


Logic is enough

Practical wisdom

One best way monoculture

Diversity is robust


Economic theory:

Price stability is enough

Output/ Financial/ Exchange Rate stability needed

Monetary analysis is enough

Credit and finance needed

DSGE is enough

Banking and finance needed

Equilibrium analysis is enough

Complex adaptive system


Policy Application:

Market discipline is enough

State supervision/orchestration needed

Inflation targeting, using interest rate rule

Multiple targets, Multiple instruments needed

Monetary policy is enough

Fiscal policy needed, plus macroprudential

Microeconomic inefficiency focus

Macroeconomic instability focus


Practitioner wisdom:

Good national policy is enough

International coordination needed

North is source of stability

North is source of instability

Northern demand is source of growth

Southern supply

North is source of knowledge/fiscal capacity

South is rising