Macroeconomic Regime Changes: Theory, Evidence, and Policy Challenges Ahead

Workshop Description

The Great Moderation, a benign macroeconomic regime lasting over 40 years in industrialized countries, might be over. The Global Financial Crisis (GFC) and ensuing Great Recession initially, the COVID-19 pandemic recession, and the geopolitical crisis triggered by Russia’s full-scale invasion of Ukraine more recently, have likely started a reversal in the favorable supply-side developments that had a key role in the Great Moderation. Hence, key questions concern the characteristics of the new macroeconomic regime lurking ahead. Is the new regime ahead inflationary or even stagflationary? The reversal in the past favorable demographic trends and the ongoing de-globalization reducing international trade and technological, capital, and migratory flows, are potential sources of inflationary pressures, and further pressures might originate from a persistent worsening in climatic conditions. Is the new regime going to be characterized by a higher natural interest rate? The potential decumulation of savings in the face of increased investment in the new regime might trigger such an outcome, also ending secular stagnation-kind distortions which have emerged since the GFC. Will the current productivity slowdown persist in the new macroeconomic regime? The productivity slowdown in advanced countries started in the 1990s and has deepened since the GFC. Several explanations have emerged, ranging from the exhaustion of the technological frontier to the delayed manifestation of the benefits of GPT innovations, and secular stagnation distortions, to name a few. This question is key also concerning the type of economic policies that should be implemented in the new macroeconomic regime. In this respect, what are the policy challenges ahead? The emergence of an inflationary bias yields an increased likelihood of wage-price spirals and the risk of deanchoring agents' expectations and undermining central bank credibility. In this context, central banks will also have to trade off higher inflation for higher financial stability, as monetary tightening, by rising debt servicing costs, might trigger financial disruptions in the private and public sectors. Other concerns include the nexus between fiscal policy and financial stability, the debt trap, and shaping supply-side policies to contrast stagflation pressures by promoting economic growth, technological innovation, and market competition.

Against these scenarios, the workshop gathers academics and policymakers to discuss recent scientific results concerning the end of the Great Moderation, the emergence of a new macroeconomic regime, and the associated challenges for economic policy. Topics of interest, without being exhaustive, concern inflation and stagflation, globalization and de-globalization, the slowdown in productivity growth, demographic and labor market trends, macroeconomic regimes and the financial-business cycle nexus, macroprudential and resilience policies, fiscal and monetary policy in a time of crisis, fiscal policy and financial stability, disinflationary supply-side policies and supply-side growth policies.

Charles Goodhart, CBE, FBA, Emeritus Professor of Banking and Finance with the Financial Markets Group at the London School of Economics will present a keynote talk on “Beyond the Great Moderation: Evidence and Policy Challenges".