The IMF and the World Bank will hold their annual meetings next week. It is an opportunity for the world’s finance ministers and central bank governors, as well as the multilateral institutions themselves, to take stock of the global economy and compare views of the challenges faced by economic policy. It can even be an occasion to broker political agreements.
But it is also a good time for outside observers to take stock of where the mainstream is headed in economic policy thinking. The flagship IMF reports published around the annual meetings indicate what the fund finds important and how it assesses the most hotly debated policy questions, synthesising what its member governments think or how far it thinks they will let it push ahead intellectually.
These repositories of the current policy orthodoxy are particularly useful when the orthodoxy itself is evolving fast. Last year’s reports marked the culmination of a shift that had been gaining momentum for some time, away from the primacy of fiscal consolidation of a decade ago and amounting to a definitive break with the deregulatory thinking of the old Washington consensus. As I wrote then, the state is back in the economic policy orthodoxy, and so is a form of economic planning. Re-reading my interview with the fund’s chief economist Gita Gopinath last year, I think the shift in IMF thinking presaged and ultimately added legitimacy to the huge US policy experiment known as Bidenomics.
So what does this year’s IMF analysis presage?
At this writing, two analytical chapters have been released from each of the Global Financial Stability Report and the World Economic Outlook (the main quantitative chapters with the headline-grabbing numbers are saved for next week). The first two clearly indicate what financial policymakers are most agitated by at the moment: one chapter is on cryptocurrencies, the other on investment funds’ role in the carbon transition. The clue is in the name of the report they are from: both are examined as risks to financial stability.
I am particularly interested in the crypto chapter, which gives us a new word that we badly needed: cryptoisation, meaning “dollarisation but with crypto”, where consumers and businesses switch away from domestic currency to a crypto asset in order to carry out domestic transactions. The IMF is right to find this threat significant enough to devote a chapter to it. It is right, too, that the best way to avoid it is for central banks to introduce their own digital currencies (CBDCs). While the fund gives its advice discreetly (and leaves it until the end of the chapter), make no mistake: CBDCs are where officialdom is headed.
As for the investment chapter, it makes some intriguing arguments as to how the green investment fund sector can best contribute to the climate transition: a “climate” label seems to direct funds to genuinely decarbonisation-ready companies, such investment funds also engage with company management in ways favouring the carbon transition, and there is evidence that investors in climate funds are more long-term-oriented and less fickle than fund investors more broadly. This leads the IMF to suggest that the green investment fund sector should be helped to grow by improving information about companies’ green credentials, combat “greenwashing” and eventually regulate to actively steer savings to green funds. All of this is controversial, to say the least, and I look forward to seeing what market experts think (such as our very own Robert Armstrong’s Unhedged newsletter, which you should sign up to).
The World Economic Outlook takes on the debate over inflation, where the fund’s economists come down squarely in the “it is temporary” camp. They estimate that in rich countries, inflation is peaking now and will come back to central banks’ 2 per cent target by the middle of next year. They warn, however, that if expectations of future inflation become unmoored, inflation could suddenly become a lot uglier. They advise both patience and readiness: do not tighten prematurely and look through short-term price movements, but be ready to act if reliable data show expectations are indeed moving too far away from the target. That may seem rather like two-handed advice, but what is clear is that the IMF is not encouraging pre-emptive monetary tightening.
Finally, there is a chapter on research and innovation, which I will simply summarise with the opening sentence from the associated IMF blog post: “Public investment in basic research will pay for itself”. Again, the new economic policy orthodoxy has a lot of room for an active state.
For those who follow the fund, these four positions may not be all that surprising. They are significant all the same.
Other readables
Diane Coyle’s FT column sets out how economics has fallen behind the times and how it must up its game.
Europe’s social democratic parties have had a good month, but challenges abound.
My colleagues give an overview of the major central banks’ approach to the current economic situation. (In case you missed it, Free Lunch took a deep dive into the Bank of Japan’s policies two weeks ago.)
Numbers news
The prices of carbon emission allowances are hitting record highs as some EU and UK utilities are switching to coal-fuelled generation in response to soaring natural gas prices.
Source: Economy - ft.com
