The Unassuming Economist

In recent years, the IMF has put on its plate several issues that appear to go beyond its ‘bread and butter’ focus on fiscal and monetary policies. These issues include: employment & migration; gender; inequality; corruption; financial inclusion; climate change. Why has the institution done so? The answer is simple: they have become critical to the IMF’s mission. These issues directly affect economic performance and stability in many countries, and thus fall under the IMF’s mandate.

Is there a unifying framework for all these new issues? There is and it can be summarized in two words: Inclusive Growth. Both words are important. We do want growth. Understanding the sources of productivity and long-run growth, and which structural policies will deliver them, thus remains an important part of the IMF’s agenda. So when we talk about inclusive growth, we are not advocating as role models either the former Soviet Union or present day North Korea—those are examples of ‘inclusive misery,’ not inclusive growth.

We want growth but we also want to make sure:

•   that people have jobs – this is the basis for people to feel included in society and to have a sense of dignity. (IMF Management set up a “Jobs & Growth” working group to emphasize the importance of this work.)
•   that women and men have equal opportunities to participate in the economy—hence our focus on gender;
•   that the poor and the middle class share in the prosperity of a country—hence the work on inequality and shared prosperity;
•   that, as happens for instance when countries discover natural resources, wealth is not captured by a few—this is why we worry about corruption and governance
•   that there is financial inclusion—which makes a difference in investment, food security and health outcomes;
•   that growth is shared just not among this generation but with future generations— hence our work on building resilience to climate change and natural disasters.

In short, a common thread through all our initiatives is that they seek to promote inclusion. What we are after is strong growth but one that is broadly shared, where major segments of society feel they have had an opportunity to make a better life for themselves.

Do the actions of central banks affect inequality? Leading central bankers have been discussing the issue (e.g., Yellen 2014; Bernanke 2015, Draghi 2016) but there is little consensus about the sign and magnitude of the effect. Our new paper documents how monetary policy affects income inequality in 32 advanced economies and emerging market countries over the period of 1990-2013. We find that decline of 100 basis points in the policy interest rate lowers inequality by about 1¼ percent in the short term and by about 2¼ percent in the medium term. The effect is significant and holds for different measures of inequality (Gini coefficient, top income shares and labor share of income). To identify the causal effect of monetary policy shocks on inequality, we borrow from the recent literature on fiscal policy (Auerbach and Gorodnichenko 2013) and construct unexpected changes in policy rates that are orthogonal to innovations in economic activity.

A nice update by Timothy Taylor on declining labor mobility in the United States and the possible reasons, a topic I have written on as well.

A new IMF working paper is the first comprehensive empirical study of earnings, income, and consumption inequality in urban China from 1986 to 2009, using unique micro-level data from the Urban Household Survey (UHS). The paper documents a drastic increase in economic inequality for the sample period. The paper finds that consumption inequality closely tracks income inequality, both over time and over the life cycle. The paper believes that the main driver of this co-movement could be a dramatic increase in noninsurable idiosyncratic permanent income shocks after the early 1990s, associated with the economic transition in urban China.

From iMFdirect:

Greece is once again in the headlines as discussions for the second review of its European Stability Mechanism (ESM) program are gaining pace. Unfortunately, the discussions have also spurred some misinformation about the role and the views of the IMF. Above all, the IMF is being criticized for demanding more fiscal austerity, in particular for making this a condition for urgently needed debt relief. This is not true, and clarifications are in order.

The IMF is not demanding more austerity. On the contrary, when the Greek Government agreed with its European partners in the context of the ESM program to push the Greek economy to a primary fiscal surplus of 3.5 percent by 2018, we warned that this would generate a degree of austerity that could prevent the nascent recovery from taking hold. We projected that the measures in the ESM program will deliver a surplus of only 1.5 percent of GDP, and said this would be enough for us to support a program. We did not call for additional measures to achieve a higher surplus. But contrary to our advice, the Greek Government agreed with the European institutions to temporarily compress spending further if needed to ensure that the surplus would reach 3.5 percent of GDP.

We have not changed our view that Greece does not need more austerity at this time. Claiming that it is the IMF who is calling for this turns the truth upside down.

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