Macroeconomic Management When Policy Space is Constrained: A Comprehensive, Consistent and Coordinated Approach to Economic Policy

Abstract

Concern is widespread that countercyclical policies have run out of space or lack the power to raise growth or deal with the next negative shock. The common perceptions are that the effective lower bound on policy interest rates limits the room to loosen monetary conditions further and that high debt constrains fiscal policy, including automatic stabilizers. That said, this Staff Discussion Note argues that room exists for effective policies and that it should be used if appropriate. Building on the three-pronged policy approach advocated by IMF Managing Director Christine Lagarde in an April 2016 speech, we argue that the most promising route involves a comprehensive, consistent, and coordinated approach to policymaking.2 Such an approach allows policymakers to better align instruments and objectives, helps them deal with shocks when they materialize, and improves economies’ resilience. It taps the synergies of different policies working together, within a country, across countries, and over time