Monetary Policy

Growth Commission Chair Michael Spence was a guest on CNBC's Squawk Box this past week, where he discussed the Fed's recent announcement that it will purchase $300 bn in long term U.S. Treasury Bills, adding to the $750 billion worth of agency backed mortgages it plans to purchase this year. Spence lauded this move by the Fed, and stressed that the key to recovery is to unfreeze the credit markets. Additionally, Spence emphasized the attention that must be paid to making sure that developing countries recover from this crisis.  Inevitably, he said, the western countries will recover, but due to an increased propensity to save, they will not likely drive the same levels of aggregate demand that existed before the crisis. This shortfall will only be made up if recovery in the developing world keeps pace with the industrial countries. To watch the interview, please click here.

The impact of the current financial crisis on the developing countries and the slide of the major industrial countries into recession pose several interesting questions for the international community and the growth commission which released its report in 2008.

Two of these questions/issues will be singled out for attention in this brief note.  Firstly, the Commission predicated its findings on an open and expanding global economy in which developing countries could import ideas, technology and know how from the rest of the world, and, secondly, the importance of leadership, effective government and experimental policy making to facilitate poor countries in achieving high and sustainable growth rates over an extended period of time.

On October 10, 2008, Michael Spence, Mohamed El-Erian and Mahmoud Mohieldin discussed the current global imbalances, macro economic global governance, and the impact it will have on the developing world.  Please access the video of the discussion here.