In opening remarks delivered on Thursday at the Korea Development Institute (KDI)/IMF Conference, John Lipsky, First Deputy Managing Director of the International Fund, outlined five basic principles for reconstructing the economy.
- Strategies must be integrated across policy instruments.
- Exit strategies must be able to adjust flexibly to unforeseen developments.
- Strategies should rely on market based incentives.
- Strategies should be established early and communicated clearly and consistently to reduce uncertainty.
Cross-country consultation and coordination on macroeconomic policies, as well as consistency across some types of financial and monetary support, can increase the chance of success. He also provided his view on a number of other issues that were to be discussed at the conference.
He emphasized the need to avoid reinstating the policies that produced a record widening of global imbalances that helped create the current crises. This is best achieved through surplus countries, such as China, increasing their domestic consumption, and deficit countries, such as the United States, increasing their domestic savings.
Rethinking Macroeconomic Policy
He noted the need to reassess many basic tenets of macroeconomic policy. “In particular, the crises has raised the issue of whether financial stability—including asset price performance—should be an explicit goal of policy, and if so, how it should be achieved. In that context, it has been noted that monetary policy is a blunt (and possibly ineffective) tool to deal with these specific additional challenges and that better and more targeted instruments should be developed.”
The Future Financial System
To limit future crises, Lipsky said that we need to create a new regulatory framework that is consistent across countries. Countries should coordinate their reform efforts.
Reforming the International Monetary System
Finally, he discussed the need to reform international monetary policy. Currently surplus countries are able to build up a surplus of dollars, the reserve currency, even beyond any kind of conceivable insurance need. Such surpluses can only be satisfied if the reserve issuer runs external deficits. To address these tensions, Lipsky said, alternative insurance arrangements could mitigate the precautionary demand for reserves and alternative reserve assets could strengthen systemic stability and efficiency.