What Have We Learned from the Crisis?
While originating a number of problems not only for its short- and long-run consequences but also for the ensuing limitations on the use of instruments, the crisis has taught us a number of other lessons on how to face problems.
It may be that the number of new problems raised outpaces that of answers - as Blanchard, Dell'Ariccia and Mauro (2014: 1) say - and that we have entered a ‘brave new world', but certainly policymakers and economists have devised new tools to face old and new issues. Not only have we discovered new instruments of monetary policy, but we have also learned that the timing of all the existing instruments and of new ones should be used in a consistent and coordinated way to pursue the government policy targets through time. This is indeed a lesson deriving from the theory of economic policy, long ignored.Consistency refers to the use of instruments in an economy in a way to simultaneously get the government’s targets. As Yellen (2014: 31) notes, before the crisis, the usual way of reasoning (at the Federal Reserve) did not go much ‘beyond “one instrument and two targets”’, and only the financial crisis and its aftermath - in presenting central banks with great challenges - transformed ‘how we look at this topic’.
The need for coordination of policy action also raises the issues of independent authorities governing in particular monetary, macro-prudential and structural policies, which should act by supporting and redirecting the economy. Finally, coordination involves agreements at an international level to reduce negative spill-overs deriving from a country’s choice and to reinforce positive ones.[43]
One cannot say that reflections of the kind we have illustrated here have led to a new conventional wisdom or are prevailing in the theoretical and practical implementations. In this respect, two levels of the effects of the Great Recession must be distinguished: a theoretical one and a practical one. As to the former, there is always some degree of autonomy of theory from practice. As to the practical acceptance of the idea of the need for government intervention, the situation is different from country to country (or region). In Europe, the conventional wisdom emerged since the end of the 1960s is still largely implemented. This was not so in the United States until recently.[44] In emerging economies, policy intervention is certainly more common.