It will take at least ten years for the world economy to recover from the economic crisis that started in 2007 and to get back to the normal shape, International Monetary Fund Chief Economist Olivier Blanchard said in an interview published on Wednesday.
"It's not yet a lost decade...But it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape," Blanchard said in an interview given to the Hungarian website Portfolio.hu.
He pointed out that though the current focus is on Europe's problems as far as economic integration is concerned, the United States with its fiscal problem also faces economic challenges that are yet to be addressed. Japan's problems related to fiscal adjustment are likely to take decades to solve, he added.
On the contrary, China is better positioned to avoid a hard landing, despite slowing growth, as it has probably taken care of its asset boom, Blanchard said.
The economist observed that in a number of advanced countries, notably the U.S., a return to full health requires replacing some of the domestic demand that fueled growth before the crisis by external demand.
For some advanced economies to reduce their current account gaps, others must cut their surpluses, the IMF official said. That calls for exchange rate adjustments, he said.
"Most emerging markets have to accept an appreciation," Blanchard said. "This adjustment is happening, but slowly. It has to happen if the world economy is to go back to health."
Turning to Europe, Blanchard said adjustment in the euro area requires a decrease in the relative price of periphery countries and an increase in the relative price of core countries.
"If the ECB wants to maintain two percent inflation for the Euro zone as a whole, this implies, arithmetically, that core countries have to have inflation higher than two percent, periphery countries have to have inflation lower than two percent, until the adjustment has taken place," he said.
According to him, a somewhat higher inflation rate for Germany is "necessary and desirable, relative price adjustment".
Regarding the management of the debt crisis, Blanchard said one has to "walk on the narrow middle path" between more stimulus and reduction in debt stocks. The countries must definitely reduce their high debt levels, but do it without hurting economic growth, he noted.
On inflation targeting, Blanchard said that though it represented progress, it has serious limitations. In situations where countries have stable and low inflation but wrong output just using the policy rate is not enough to solve the problem. "The way to think about monetary policy in the future is that the central bank has in effect two sets of tools," he said.
"One is a traditional one, the policy interest rate. The other is the set of macro prudential tools, from loan to value ratios, to cyclical capital ratios, etc."
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