The New Macroeconomic Paradigm: Pandemic Lessons and Policy Needs
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William White joined us for an informative presentation and discussion on the new macroeconomic paradigm and an assessment of the road ahead. Mr. White presented a sober-minded view of the risks and challenges of fiscal and monetary policymaking in a world leaving behind an era of “plenty” and entering one of “shortages,” whereby higher-than-trend inflation and interest rates become the norms. He identified factors driving the paradigm shift, including historical and future negative supply shocks like latent pandemic effects, the Russian invasion of Ukraine, malinvestments, global workforce contraction, and climate change. Additional factors included supply chain restructuring under geopolitical pressures, massive demand for new capital investments to cushion supply shocks, and the associated burdens on public spending.
Mr. White spoke to the constraining effect that historical macro stimulus would have upon policymakers navigating the new era of shortages. Sustained ultra-loose monetary policy has contributed to persistently high asset prices, mounting debt levels of relatively poorer quality, heightened concerns of financial instability from new monetary tightening, and the optical challenge of central bank operating losses when policy normalizes with higher interest rates, among other consequences. With less room to maneuver, authorities face “hard choices” with ancillary risks. These include the imperative to tighten monetary policy, practice greater fiscal restraint, enact orderly debt restructuring and cut private consumption. Citing approaches taken after the Second World War, Mr. White pointed to potential “financial repression” as an alternative course, which would seek to artificially hold down interest rates while accepting some degree of higher inflation on a sustained basis. However, he remained uncertain about the feasibility of such an approach in today’s era.
Mr. White concluded his prepared remarks by emphasizing the broader implications of the macroeconomic paradigm shift. Macroeconomic instability inhibits society’s ability to address structural problems in political, healthcare, environmental and other fragile systems under serious stress.
During the question-and-answer segment, and moderated discussion, Mr. White cast doubt on the effectiveness and future value of unconventional monetary policy tools like forward guidance and quantitative easing beyond financial market crisis periods. He also noted the limitations of conventional macroeconomic models as predictive instruments in a complex and adaptive world, and emphasized the need for scenario-based analysis and communications as policy tools. He further warned that major central banks may overestimate how quickly they can reverse their current course of monetary tightening. White also questioned the logical process informing current market expectations that either a disinflationary recession or trend of “immaculate disinflation” will help to restore price stability.
William White, Former Chairman, OECD Economic and Development Review Committee, and Senior Fellow at the C.D. Howe Institute