Discussion of “Policies to Rebalance the Global Economy After the Financial Crisis”

This paper analyzes the impact of alternative policy scenarios in the aftermath of the financial crisis. The policy challenges that are considered cover a broad range of issues—from securing a sound financial sector and sustaining public investments to supporting future productivity developments, avoiding protectionist policies that would decrease the degree of competition in goods and labor markets, improving current account imbalances through an appropriate adjustment of national savings and exchange rates, and preventing protracted excessive fiscal deficits. The impact of alternative policy choices on these issues is illustrated by simulations with the International Monetary Fund’s Global Integrated Monetary and Fiscal (GIMF) model. The exercise nicely illustrates the strength of such a structural model to analyze a wide variety of relevant policy questions. The outcomes of the simulations indicate that appropriate policy choices can result not only in favorable prospects for the pickup in global GDP growth but also in a more balanced growth path that alleviates the current account imbalances. The main focus of the paper is on fiscal policy with a strong call for fiscal consolidation. If current public deficits translate into permanently higher public debt ratios, GIMF simulations predict an increase in global long-term real interest rates and increased risk premiums for specific countries, which would lead to a permanent crowding out of private capital accumulation and—in particular, in the case of the United States—to persistent current account imbalances and increasing foreign liabilities. With this message, the focus of the paper is clearly on the mediumand long-term implications of fiscal policy. In previous work published in spring 2009 in the middle of the crisis, the authors used the same model to argue for a global fiscal stimulus package in order to reduce the deflationary effects of the financial crisis (Freedman et al. 2009). That paper discusses in detail the conditions under which a fiscal expansion is most