1. Douglas Laxton, Research Department, IMF
Macroeconomic Management When Policy Space is Constrained: The 3-C Approach to Economic Policy
Douglas Laxton, Research Department, IMF
“Challenges for Global Macroeconomic Stability and the Role of the G7: Proceedings of a Conference Organized by the IAI Rome, 27 and 28 March 2017
Disclaimer: This presentation is based on IMF Staff Discussion Note No. 16/09. The views expressed in this presentation are those of the authors and do not necessarily represent the views of the International Monetary Fund, its Executive Board, or its management.

2. References
Gaspar, V., M. Obstfeld, R. Sahay, D. Laxton, D. Botman, K. Clinton, R. Duval, K. Ishi, Z. Jakab, L. Jaramillo Mayor, C. Lonkeng Ngouana, T. Mancini Griffoli, J. Mongardini, S. Mursula, E. Nier, Y. Ustyugova, H. Wang, and O. Wuensch, 2016, “Macroeconomic Management When Policy Space is Constrained: A Comprehensive, Consistent and Coordinated Approach to Economic Policy,” IMF Staff Discussion Notes No. 16/09.
Alichi, A., K. Clinton, C. Freedman, O. Kamenik, M. Juillard, D. Laxton, J. Turunen, and H. Wang, 2015, “Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States,” IMF Working Paper No. 15/134.
Arbatli, E., D. Botman, K. Clinton, P. Cova, V. Gaspar, Z. Jakab, D. Laxton, C. Lonkeng Ngouana, J. Mongardini, and H. Wang, 2016, “Reflating Japan: Time to Get Unconventional?” IMF Working Paper No. 16/157.
Clinton, K., C. Freedman, M. Juillard, O. Kamenik, D. Laxton, and H. Wang, 2015, “Inflation-Forecast Targeting: Applying the Principle of Transparency,” IMF Working Paper No. 15/132.
Obstfeld, M., K. Clinton, O. Kamenik, D. Laxton, Y. Ustyugova, and H. Wang, 2016, “How to Improve Inflation Targeting in Canada,” IMF Working Paper No. 16/192.

3. Outline of the Presentation
Risks in the macroeconomic landscape: is there policy space to respond to a new global shock?
A Comprehensive, Consistent, and Coordinated (3-C) Approach to Economic Policy
Applications to Canada and Japan as examples of the policy spectrum for the 3-C approach
International Policy Coordination

4. Lower Global Equilibrium Real Interest Rate Challenges Monetary Policy
Source: Laubach and Williams (2015), Obstfeld and others (2016), and Nomura (2016).
Source: World Economic Outlook, April 2016.

5. The 3-C Approach to Economic Policy
Comprehensive policy actions, like the three-pronged policy approach, exploit synergies by combining structural reforms with a demand-management framework.
Consistent and systematic policy actions guided by policy frameworks provide decisive short to medium-term accommodation without derailing longer-term expectations.
Coordinated policy actions across countries amplify the effects of individual policy actions.

6. Long-term Inflation Expectations Better Anchored in Inflation-Forecast Targeting (IFT) Countries
IFT economies see
their 3-yr-ahead expectations
anchored at target or
slightly overshoot
Euro Area and Japan
see their 3-yr-ahead
expectations
drifting downwards
Note: IFT economies: Canada, Czech Republic, New Zealand, Sweden, U.S. Data consists of the 9 Consensus Long-term Surveys in Source: Consensus Economics.

7. Permanent Increase in Government Investment
Improvement in Efficiency
Improvement in Efficiency
Improvement in Efficiency
Improvement in Efficiency
Note: Horizontal axis indicates the year. Both simulations show the effects of one country acting alone, under two years of monetary accommodation. Increase in government investment is equal to 1% of baseline GDP permanently. Improvement in efficiency is modeled as a permanent shift from government consumption to government investment equal to 1% of baseline GDP. Results based on the GIMF model.

8. International Policy Coordination (IPC)
In the event of a further downward global shock, IPC would reinforce expansionary effects through positive spillovers.
Fiscal and other policies aimed at raising potential growth and the global equilibrium real interest rate require IPC.

9. Significant Positive Spillover Effects
Effects on Real GDP Level in Year 1 (Percent deviation from baseline)
When each region stimulates on its own
When stimulus is coordinated in all regions
Effects on
World --
2.4
United States
1.1
1.6
Euro Area
0.9
1.5
Japan
1.8
Emerging Asia
2.0
3.4
Latin America
Remaining Countries
1.4
2.3
Note: The size of the three-year fiscal stimulus is equal to 1 percent, 1 percent, and 0.5 percent of each region’s baseline GDP, respectively. It consists of government investment, government consumption, and targeted transfers, with their respective share being ¼, ¼, and ½ of the total stimulus. Monetary policy in all regions accommodates the fiscal expansion by keeping nominal policy interest rate unchanged for two years.

10. International Policy Coordination Results in Lower Debt/GDP Ratios
Effects on Debt/GDP Ratio in Year 4 (Percentage deviation from baseline)
When each region stimulates on its own
When stimulus is coordinated in all regions
Effects on
World --
-0.7
United States
0.8
-0.4
Euro Area
0.9
-0.3
Japan
0.2
-1.8
Emerging Asia
-1.4
Latin America
0.7
-0.6
Remaining Countries
0.5
Note: The size of the three-year fiscal stimulus is equal to 1 percent, 1 percent, and 0.5 percent of each region’s baseline GDP, respectively. It consists of government investment, government consumption, and targeted transfers, with their respective share being ¼, ¼, and ½ of the total stimulus. Monetary policy in all regions accommodates the fiscal expansion by keeping nominal policy interest rate unchanged for two years.

11. + + Comprehensive Policy Actions under Consistent Policy Frameworks
Coordinated Internationally
Monetary
Accommodative Monetary Policy under Credible Monetary Policy Framework
Fiscal
Fiscal Stimulus Focus on
High-Multiplier Instruments
under Credible Fiscal Framework
Structural
& Financial
Labor Market, Product Market,
and Productivity-
Enhancing Reforms, Financial Sector Policies + +
Sustained and Inclusive Economic Growth
Anchored Inflation Expectations
Sustainable Public Debt-to-GDP Ratio
Job Creation

12. Thank you!