Rethinking Macroeconomic Policy

Blanchard, O., Dell’Ariccia, G. & Mauro, P., (2010). Rethinking macroeconomic policy. Retrieved February 14, 2010 from: http://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf

This paper, published by the International Monetary Fund (IMF), was researched and written by IMF officials that work in the Research and Fiscal Affairs Departments of the organization. Its purpose is to relook at how to use monetary policy in the future to hedge against the possibility of another “Great Recession” like the most recent one. The paper is split into three sections: first, What We Thought We Knew. In this section, they discuss how things have been handled in the past. The focus has been on one target, low inflation, and one tool, the policy rate. In the second section, What We Have Learned From the Crisis, they discuss that stable inflation may be necessary, but is not sufficient. Additionally, low inflation limits the ability for central banks to react because nominal interest rates are already very low and there is not much room to reduce them in a crisis. The final section, Implications for the Design of Policy, discusses possible changes that should be considered. These include: raising the inflation target, from 2 percent to 4 percent, possibly, which would, in turn, raise interest rates; combining monetary and regulatory policy; inflation targeting and foreign exchange intervention; and others. This paper is good for managers to read because it helps them to understand more about monetary policy and how it affects interest rates and inflation, which has very important consequences to most all businesses. It also shows how politics can gain more control over businesses, which should be taken into consideration as well.