Exchange Rates

In an opinion piece featured in the Financial Times' The Economists' Forum on October 27th, Michael Spence offers suggestions on how to avoid the deepening of an asset deflation overshoot which has already begun, and will likely get worse if not attended to by leaders in both industrial and developing economies. Key highlights include coordinated actions by the government and private sector to recapitalize banks, direct intervention in housing markets, IMF coordination of reserve surplus countries,  and private corporation stock buy-back programs. Please access the article here.

Debate among economists about the $700 billion Paulson plan reveals a deep divide between realists and fundamentalists. If economists and policy makers pay attention to how the tension between these two positions plays out in this particular debate, it will help us know how to deal with it in other areas, including development.

The formal, model-based approach of the fundamentalists has contributed much to progress in economic analysis. At key junctures, it has also made important contributions to policy. The challenge is to maintain an intellectual environment that leaves space for a conversation with realists as well. In complicated policy contexts where models don't yet capture key forces, the realists have much to offer both policy makers and fundamentalist modelers. By giving voice to observations that strike realists as obvious but that are not accepted in conversations dominated by fundamentalists, the report by the Commission on Growth and Development could encourage a richer, more open debate about the policy options for poor countries.