Opening Remarks by Dominique Strauss-Kahn, Managing Director, International Monetary Fund
Given at the 10th Jacques Polak Annual Research Conference
As Prepared for Delivery
Good morning, ladies and gentlemen. I am delighted to welcome you to the IMF’s Jacques Polak Annual Research Conference. Since it was first launched, the Annual Research Conference has become one of the major international forums for researchers and policymakers to exchange their views about issues related to the global economy. We, at the IMF, do our best every year to put together the strongest conference program possible, but, it is ultimately the contributions of presenters, discussants, and participants that make our research conferences successful. This year’s event is a special one as we are celebrating the 10th anniversary of the conference with an outstanding program of papers.
Besides the 10th anniversary of the conference, we can also have some joy in the achievements of economic policies employed over the past year. Many predicted doom and gloom for the global economy just a year ago. Thanks to timely and effective policy interventions at the global level, the worst was avoided. We cannot deny that there will be long-term difficulties associated with the unprecedented policy measures adopted, but the alternative would have been worse. Surely, we have numerous policy challenges ahead of us, and we need to put the best economic minds to work to help us think through these highly complex problems.
Spirited debates, triggered by the financial crisis, have emerged among economists about of the state of macroeconomic research over the past year. It is natural that we engage in this healthy debate as we search for the best solutions to overcome the multitude of difficulties stemming from the crisis. As with previous crises episodes, there are lessons to be learned. So, what have we learned this time around? One can come up with a number of answers to this question. However, it is fair to say that, one of the most important lessons we painfully learned is that we need to have a much better understanding of macro-financial linkages.
Macro-financial linkages are at the heart of the two-way interactions between the real economy and the financial system. Vulnerabilities stemming from the financial sector can amplify macroeconomic shocks, while weaknesses in the real economy can undermine the stability of the financial sector. Macro-financial linkages, in turn, can complicate and reduce the effectiveness of traditional monetary, fiscal, and regulatory policies. The crisis showed, once again, how sharp fluctuations in asset prices, rapid growth of credit, and surges in capital flows can have profound effects on the real economy. As we have witnessed over the past two years, such developments, in turn, can bring the global financial system to the brink of collapse and lead the world economy into a deep and prolonged recession.
I am happy to see that the conference program provides an excellent sample of the innovative research analyzing macro-financial linkages. There is much to be learned from the papers being presented at this conference. As I was going over the conference program, I kept thinking about the decisions made by our 186 member countries at the latest IMF-World Bank Annual Meetings in Istanbul. These “Istanbul Decisions” will guide our work program as we help our membership to shape the post-crisis global financial system. I see three broad themes where the conference program relates to the Istanbul Decisions.
The first theme I see in the program is the need to have a better grasp of the critical role the financial sector plays in shaping macroeconomic outcomes. A number of conference papers show how deteriorating balance sheets can rapidly result in difficulties in the real economy and force governments to undertake radical policy measures, as we have vividly seen during the latest crisis. As you know, the IMF has been extensively studying the implications of balance-sheet adjustment for the real economy in the context of our broader research program on macro-financial linkages.
One of the decisions made in Istanbul was to undertake a review of the IMF’s mandate so it encompasses the whole range of macroeconomic and financial sector policies that affect the health of the global economy. During this review process, we will utilize the results of recent research on macro-financial linkages in order to help our membership devise policies that promote global financial stability and economic growth.
The second theme to be discussed at the conference is the importance of understanding how a financial crisis can spread globally. Although financial flows can deliver many long-term economic benefits, they can also create important challenges for policymakers. For example, they have the potential to generate over-heating, loss of competitiveness, and increased vulnerability to crisis. During the latest crisis, financial flows served as a channel transmitting the financial turmoil from advanced countries to the shores of emerging markets. We cannot overemphasize the importance of employing sound policies at both national and global levels in order to meet the challenges stemming from financial flows while enjoying their growth benefits.
The IMF has been acutely aware of these challenges, and, since the beginning of the crisis, it has played a critical role supporting the coordination of global policies. Going forward, this coordination at the global level will require some new mechanisms. In response to the calls from our membership at the Istanbul Meetings, the IMF will help the Group of Twenty countries with their mutual assessment of economic and financial policies. In particular, our objective is to develop a forward-looking analysis of whether policies are collectively consistent with more sustainable and balanced trajectories for the global economy. This represents a brand new role for the Fund requiring us to improve the intensity and effectiveness of our multilateral surveillance functions.
Finally, let me talk about the third theme of the conference that is the prevention of and responses to crises in a highly integrated global economy. The paper prepared for the Mundell-Fleming lecture draws an illuminating analogy between a sudden cardiac arrest and a financial crisis. The paper then derives some thought provoking policy implications making a case for the importance of financial regulation and systemic insurance arrangements in preventing future crises.
The Fund has been working very hard to develop policies to both mitigate the adverse effects of financial crises and to prevent future ones. Of course, one of the important lessons of the latest episode is that the global economy needs much better policies of financial regulation and supervision. We also need insurance and funding arrangements in place to provide rapid relief to those countries affected by the crisis. These observations are very much in the spirit of another Istanbul Decision calling for the IMF to enhance its lending and reserve facilities to be better equipped to avoid crises and respond to them when they arise. In particular, we will assess in the coming months how to build on the success of the Flexible Credit Line facility and provide insurance to countries in need as the global lender of last resort.
Research is one of the most critical activities we undertake in the Fund. It fuels our creativity and helps us to stay ahead of the curve. As we have done in the past, we will continue utilizing the results of cutting edge research in order to carry forward the momentum of the Fund’s recent successes and deliver on its new responsibilities. This year’s conference is an exciting opportunity to enhance our understanding of topical issues with the help of frontier research papers. So, let me conclude with saying that I am very pleased to see you all here, and I am sure you will have very productive discussions over the next two days.