Economic Policy Objectives and Policymaking in the Major Industrial Countries

Jacques Polak’s stimulating paper on this ambitious subject provided an ideal background for the discussion of the current issues on the national and international level.

Polak’s knowledgeable analysis of the radical change in policy concepts over the past three decades and the associated change in the role of policy instruments found broad agreement, while his assessment of these developments attracted some qualifying comments. His thesis that there has been a clear retreat from activist demand management and ambitions of macroeconomic fine tuning was thoroughly confirmed in the course of the conference by participants who were or had been actively involved in policymaking. At the same time, some speakers insisted that, among the whole arsenal of economic policy tools, discretionary demand management cannot and should not be completely dismissed as an instrument in appropriate situations.

As to the underlying reasons for the pronounced shift among economic policy priorities and instruments in the late 1970s and the early 1980s, both Helmut Schlesinger and Martin Feldstein stressed the poor results and the adverse side effects of the previous activist government policies.

According to Schlesinger, the governments of the major industrial nations, regardless of their ideological background, had no choice but to concentrate on the fight against inflation and adopt more “conservative” structural policies in order to prevent further serious erosion of the free-market conditions in their economies. In his view, the industrial countries’ impressive economic performance from the mid-1950s to the second half of the 1960s was in large measure attributable to the prevailing favorable supply-side conditions rather than to activist growth and employment policies. He recalled, inter alia, the very low level of commodity and energy prices and the beneficial effects of the rapidly expanding international trade and technology transfer.

In the discussion of present economic policy objectives and priorities, the question was repeatedly raised whether the emphasis on price stability was not receding somewhat in favor of growth as a primary goal. The calls for greater symmetry in the adjustment obligations within the European Monetary System (EMS) were mentioned as an indication of such a conceivable change in an environment of greatly reduced inflation and persistent high unemployment in many countries. On the other hand, there was a strong feeling that a relapse into post-Keynesian policy attitudes of the past was hardly in the offing and that the chastened view as to how growth could be promoted over the long term, which Polak mentioned in his paper, would continue to prevail among policymakers.

In this context, Schlesinger pointed out that economic growth was, after all, in his view not a final goal; instead he defined national prosperity, social peace, and the preservation of nature as primary concerns of the industrial nations.

As regards the role of policy instruments under the economic policy concepts of the 1980s, monetary policy has clearly assumed a major part in securing appropriate conditions for inflation-free long-term growth. In the discussion on the design of monetary policy, Feldstein expressed himself strongly in favor of targeting nominal GNP rather than monetary aggregates, as the GNP approach facilitated adjustment to unpredictable velocity changes. On the other hand, Jacob A. Frenkel mentioned the problem of large lags in statistical measurement and the usual necessity of substantial revisions as possible drawbacks to nominal income targeting and asked whether we were not potentially falling into a new trap of fine tuning as our notion of where the target should be may change over time. And Jacques Melitz suspected that nominal income targeting as opposed to money supply targeting might imply a greater risk of accommodative policies. Schlesinger, on his part, stressed that the Bundesbank has never treated its monetary targets as targets in their own right but has always regarded them literally as “intermediate targets.” He was supported by Feldstein in advising pre-announced targets as a guide to the public’s understanding of and confidence in monetary action.

Both Schlesinger and Feldstein rejected the idea of using nominal exchange rate targets as a guide for monetary policy. Feldstein pointed out that international trade and capital flows are affected by real magnitudes, that is, by real rather than nominal exchange rate changes, and he warned of the potential adverse effects on domestic economic targets of attempts to stabilize or otherwise influence (nominal) exchange rates through monetary policies. According to Schlesinger, the stabilization of nominal exchange rates was not a goal “in its own right” for the central banks of the major industrial countries, even though, more recently, they have tried to maintain orderly conditions in foreign exchange markets by coordinated interest rate policies and interventions. His argument that the major central banks’ primary responsibility was the preservation of the domestic purchasing power of their currencies and that exchange rate targets could not provide a suitable nominal anchor for economic policy decisions in their countries was not challenged.

Turning to the other traditional instruments for demand management (besides monetary policy), the general demise of incomes policy because of its proven inflationary bias, as described by Polak, was not questioned or commented on at any length. In contrast, and not surprisingly, there was a great deal of discussion during the entire conference on the role of fiscal policy and the connected problem of the appropriate mix of monetary and fiscal policies. The fiscal rigidities resulting from the more critical view in the 1980s on government finance and the efficiency of the fiscal tool, which Polak so aptly traced in his paper, did not lead him or other members of our group to conclude that fiscal policy could be dismissed as an instrument for discretionary government action. On the contrary, since monetary policy was primarily responsible for medium-term price stability and its usability for other goals was correspondingly restricted, many speakers felt that fiscal policy had to play an instrumental role in influencing economic growth and promoting the necessary corrections of international payments imbalances.

In this context, Frenkel mentioned the growing recognition of and emphasis on fiscal interdependence, whereas some years ago the focus had clearly been on monetary interdependence through the exchange rate. He noted that still much of the analysis was in terms of the total size of budget deficits or current account deficits, and he suggested that more attention should be given to the components of these deficits or the quality of the underlying measures, which would also imply a distinction between government revenue and government spending.

This brings us to the role of structural policies. Polak’s finding that such supply-side-oriented policies have moved to the foreground in today’s macroeconomic policy concepts was evidenced by many contributions to the discussion throughout the conference. At the same time, his assessment that the results of the new policy stance have thus far generally been unimpressive, with the exception of the United Kingdom, was widely shared.

Is it lack of courage or concern for social peace which prevents politicians from taking more vigorous action in the fields of deregulation and privatization as well as in eliminating protection in the form of trade barriers and subsidies? This question was not fully answered. There was, however, a broad consensus that the possible role of international institutions or organizations in promoting structural adjustment in developed countries should not be overrated. Hans-Eckart Scharrer, who drew attention to the positive results of sectoral deregulation in a number of countries, pointed out that the benefits of supply-side-oriented policies were in fact being transmitted via the market mechanism, that is, through the competition among countries and regions for investments. By the same token, the project of a single European market based on the mutual recognition of national standards was welcomed by a good number of speakers as a means for speeding up the necessary improvement in supply-side conditions—not least in the Federal Republic of Germany, where progress on this score has clearly been disappointing so far.

Among the various instruments of microeconomic government policies, structural tax changes—as distinct from the traditional tax changes under the Keynesian fiscal policy concept—no doubt deserve attention, as the “competition” between tax reforms around the globe has clearly shown. Feldstein, therefore, found broad support when he stressed the important role of structural tax policies in the endeavor to improve resource allocation and long-term growth. Furthermore, he pointed out that in today’s global environment of high capital mobility in which individual countries are largely unable to control their real interest rate, the demand for investment and the mix between consumption and investment can be influenced by targeted tax rules.

All in all, the need for determined efforts to improve supply-side conditions in industrial countries was uncontested and it was widely accepted that this was probably the only feasible approach at this moment to foster growth in Germany where the limit for further constructive action has been reached both in monetary and fiscal policy.

But as already indicated, some speakers (like William Branson and Wilhelm NÖlling) clearly warned about the dangers of a distorted policy mix with an overemphasis on the supply side. And Heinrich Matthes reported on the concern of the EC Commission about Europe being caught in a “low-growth trap” and on the “two-handed strategy” it had designed to avoid this danger. He pointed out that the case for a strategy which attributed equal importance to demand and supply-side policies was more urgent today than ever; this is not only because of the aggravated center-periphery problem within the EMS but also in view of the 1992 exercise which will bring a big supply shock to the economy. Matthes believed that the full benefits of a single European market could only be reaped if the demand side was given serious reconsideration. According to Frenkel, structural policy and demand management via fiscal and monetary policies should be viewed as complementary rather than as subsidiary. He felt that structural policies should be seen as a means to provide the infrastructure and the credibility that are necessary for the effectiveness of conventional fiscal and monetary policies.

Capital Flows and Capital Market Innovations, and Impact on Economic Policies

These topics were the subject of a roundtable discussion chaired by Richard D. Erb, Deputy Managing Director of the Fund.¹ As it turned out, the Chairman’s view that “the impact of economic policies on capital flows and capital market innovations” might perhaps have been a more appropriate title for their debate, was shared by the majority of the panelists.

According to Benedikt Fehr, international capital flows are generated in reaction to the more or less market-oriented domestic policies pursued in the major financial centers. If the volume or direction of such flows is considered to be disturbing, governments should, in his view, adjust their domestic policies rather than try to correct them at the international level through protectionist action or other dirigistic interventions aimed at influencing interest and exchange rates.

In his comments Horst Bockelmann pointed to our insufficient understanding of, and the failure thus far to master, the consequences of the evolving global financial market and the associated risk of instant transmission. He maintained that both economic policy coordination and national policymaking would have to be improved to cope with this situation, but was not certain that even then the manifold risks inherent in today’s financial system could be effectively controlled.

Rolf Breuer commented on capital market innovations, which could be the reason for or the result of capital market imbalances (as is the case with swaps and futures). He pointed to the lack of transparency in this area, which complicated the task of policymakers and suggested that the supply of more extensive information on innovation-induced global capital flows would be a worthy matter for international cooperation,

Helen Junz remarked that, in the past, financial innovations had mainly been defensive action in an environment of instability. And she asked whether, in the current phase of genuine innovation, as capital restrictions are being lifted around the globe, we could expect innovations that would contribute to greater stability, for example, by supporting the debt strategy or by reducing transaction costs in the face of very high real interest rates. The answer would crucially depend on the further course of government policies.

Heinrich Matthes commented on the challenges facing the EMS in connection with the full capital liberalization that was envisaged. He recalled that the good performance of the exchange rate mechanism up to now had been warranted by the existence of interest rate differentials and by occasional realignments. And he stressed that financial liberalization would be incompatible with the EMS only if the authorities were to aim simultaneously at fewer exchange rate changes, smaller interest rate differentials, and divergent monetary policies. He concluded that the pressing task of closer policy coordination in the transition period to a single currency area could not be restricted to central banks but must be extended to the whole range of financial and economic policies with special emphasis on the supply side.

Wilhelm NÖlling drew attention to the recent massive increase in the amount of trading and to the huge volumes of financial transactions that had clearly lost touch with real investment and production. Explicitly combining his question with a value judgment, he queried the advantages of and benefits from totally free financial markets and capital flows. He pointed to the adverse effects of high capital mobility on the effectiveness of monetary policies and on budgetary discipline. He doubted whether we had the necessary insight and appropriate instruments to control a crisis situation. NÖlling suggested that we seriously try to get more information and pay attention to the findings of the Brady Report and its proposals. In presenting the views of the Bank of Japan, Shijuro Ogata commented on the analytical problems in assessing monetary and financial developments as well as on the operational problems in the conduct of monetary policy in today’s global financial system. Among the latter, he mentioned the difficult choice in central banks’ day-to-day operations between responding to domestic stability needs and containing exchange rate changes, but also the impairment of the interest rate mechanism in the closely interlinked innovative markets.

This notwithstanding, he firmly believed that the trend toward liberalization, globalization, and innovation was irreversible. Since he considered capital flows to be a reflection of economic conditions and policies in the countries concerned, Ogata was strongly in favor of international macroeconomic policy coordination despite its undeniable deficiencies.

It is interesting and reassuring to note that none of the panelists nor any of the participants in the general discussion was in favor of reintroducing capital restrictions or throwing sand in the wheels in any other way. There was, however, general support for an enhanced and coordinated prudential supervision and for imposing sound rules of conduct so as to strengthen financial market structures.

In this context, the comments of Jürg Niehans on capital mobility deserve mention. He pointed out that the huge transaction volumes in today’s international capital markets are a result of the highly perfected asset arbitrage. These arbitrage movements had hardly anything to do with actual international capital flows as measured in the financial statistics at an entirely different level. Such genuine capital flows took place between countries with inverse domestic savings/investment imbalances, that is, from countries with excess savings to those with excess investment. Niehans believed that the speed with which savings and investment in different countries reacted to disturbances was in actual fact much lower today than it was a hundred years ago, owing mainly to the longer gestation lags of investment. He pointed out that because of the low capital mobility very large changes in exchange rates and interest rates had been needed in order to achieve the international distribution of assets necessitated by the U.S. budget deficits that started in 1981. He concluded that we could only wish for a much higher capital mobility as this would help to reduce the adjustment problems generated by international disturbances.

International Adjustment and the Dollar: Policy Illusions and Economic Constraints

In his model-based comprehensive analysis of this topical issue William H. Branson arrived at the following main conclusions:

• A real depreciation of the dollar of about 15 percent, in effective terms (and from its level at the beginning of 1988), is needed to move the U.S. current account balance to equilibrium by the early 1990s.

• A real depreciation of the dollar is the very mechanism through which a shift in the fiscal mix between the United States and the rest of the Group of Seven countries would restore international balance (whereas the view in official policy discussions seemed to be that fiscal contraction in the United States and a corresponding expansion in Europe and Japan could substitute for a further dollar depreciation).

• A preferable coordinated policy approach would be the combination of fiscal tightening in the United States and monetary (rather than fiscal) expansion abroad, as it would smooth the exchange rate path and reduce world real interest rates to the benefit of developing country debtors.

Branson’s clear-cut presentation of a very complex issue provoked a differentiated and often controversial discussion.

The critical observations on some underlying assumptions in Branson’s models (for example on elasticities) as well as his choice (and definition) of targets and variables are to a large extent covered in the contributions to this volume by Niels Thygesen, Alexander K. Swoboda, and Scharrer.

The considerations and conclusions in the general discussion that have a more direct bearing on the major countries’ adjustment policies may be briefly sumarized as follows:

It is extremely difficult if not impossible to determine reliably the real equilibrium exchange rate on which all models—and, of course, adjustment in reality—hinge. By the same token it is uncertain where we are on the adjustment path. From this, Feldstein concluded that the policymakers should not spend taxpayers’ resources in trying to defend the current value of the dollar, whereas other speakers (Thygesen, Swoboda, Schlesinger, and Flemming, for example) felt that under the prevailing conditions there were valid reasons for the present Group of Seven policy stance on (nominal) exchange rates.

However, Branson’s basic precept that fiscal policies aimed at external adjustment cannot substitute for (real) exchange rate changes was not seriously contested (unlike his projection of the dollar’s movement over time in reaction to a U.S. budget cut). It was pointed out, though, that the central bank policy stance in the countries concerned played a decisive role for the relationship between fiscal policies and exchange rate changes.

Given the fact that there is a great amount of uncertainty about the “right” or sustainable dollar rate, participants felt that it should not be overlooked that conditional predictions of a further substantial fall of the dollar as given by Branson or other academics imply the danger of adversely affecting the confidence of the business community. The same is true with regard to potentially misleading statements from official parties on their exchange rate policy intentions. We should not forget that confidence is an essential ingredient of the willingness of industrialists to invest and thus of the chances for growth.

As to the scope of the international adjustment requirements, the view was widely shared that Branson’s target of reducing the U.S. current account balance to zero by the early 1990s was unnecessarily ambitious and the medium-term adjustment constraints derived from his model were correspondingly overstated. Schlesinger saw no reason in this context why U.S. debt should not grow as long as it was kept in a sound relationship to GNP or exports. It might be useful for the United States itself and for the world if it were to remain a debtor country for a longer period. The near-term problem was how to establish a sustainable situation in a broad sense, that is including capital imports and exports, on the part of both the United States and the surplus countries.

In the discussion on policy options for promoting adjustment in the deficit and surplus countries, Branson’s preference for a package with greater emphasis on fiscal contraction, that is, further progress in budget consolidation at the world level, found strong support in principle. On the other hand, Thygesen rightly pointed out that Branson’s prescription for expansionary monetary policies abroad had already been followed in Japan and Germany and a further monetary expansion in these countries would be hazardous. Against this background, Morris Goldstein referred to a third possible package discussed in the Fund’s World Economic Outlook—a combination of fiscal contraction in the United States with enhanced implementation of structural policies in the surplus countries aimed at increasing output. Doubtful as one may be about the progress we may reasonably expect in this area—even determined structural policies take time to become effective—one can only subscribe to the Fund’s general formula, as stated by Frenkel, that what is needed is symmetry of action rather than symmetry of policy instruments.

What should be the role of trade policy in this context? In his comments on this question, Scharrer suggested that the downward adjustment of the dollar could be eased by the adoption of more liberal trade policies in Europe. His thesis was not generally endorsed, however. While everybody was clearly in favor of trade liberalization in its own right, some speakers warned about introducing this argument into the debate on macroeconomic adjustment and policy options to improve the U.S. current account deficit. The danger of a “symmetric argument” in support of protectionism in the United States was mentioned. In short, it was felt that the case for trade liberalization should be based on different grounds.

The controversial discussion on Branson’s paper and on the Fund’s MULTIMOD presented by Goldstein, and extensively commented on by John Flemming on the following day, gave rise to some more general thoughts on the possibilities and limitations of econometric models as well as on their current role in forecasting and economic decision making. On the latter subject, the central bankers who participated in the conference reported that their banks had developed models of their own and encouraged the study of other models in order to gain a better understanding of this tool. The results of the models were used as background information and could help policymakers to clarify their minds, but did not serve as a basis for decision making.

Frenkel, one of the Fund experts working with such models, stressed that in his view their main role was to draw attention to the long-term implications of current developments and policy decisions. At the same time he admitted that experts had learned the hard way to be very modest about projections from mechanical models. It was therefore essential, to his mind, not to stick too narrowly to models but rather to rely on a continuous interaction between models and good judgment.

For the time being, the choice of appropriate (though necessarily imperfect) models will, no doubt, remain an essential issue in the international policy debate. The discussion of the Branson paper and the MULTIMOD presentation has clearly shown how difficult it will be to come to a common understanding on how economies work and which results the use of various instruments will have.

International Coordination of Economic Policies

The debate on this suggested by Grosubject was based on two papers: Güer’s survey on the empirical evidence for the effects of policy coordination among the major industrial countries since the Ram-bouillet Summit meeting of 1975, and the conceptual paper of Frenkel, Goldstein, and Paul Robert Masson on the scope, methods, and effects of international policy coordination.

Groβer aptly traced the changing course of international economic policy coordination since the mid-1970s and its underlying reasons and constraints. His methodological considerations indicated how difficult it is to clearly define and identify macroeconomic policy coordination and, even more, to evaluate its effects. These latter issues, which partly explain the diverging attitudes toward economic policy coordination, are further elaborated in Manuel Guitian’s comments on Groβer’s paper.

The comprehensive survey by Frenkel, Goldstein, and Masson served as a useful guide to an assessment of the potential risks and rewards of international economic policy coordination. The authors addressed the key issues of this highly complex undertaking in the field of political economy but refrained, understandably, from providing clear-cut answers on the policy or strategy level, as Jürg Niehans noted in his comment.

The discussion was greatly enriched by the contribution of firsthand information from participants who, like Toyoo Gyohten and Hans Tietmeyer, are or have been actively involved in international policy cooperation, and by their personal assessment of the further scope and direction of this process.

In view of the high degree of economic interdependence and, in particular, rapid world financial integration, it was generally felt that the question was not whether but how to cooperate. The versatile term “policy cooperation” was preferred by many speakers to the narrowly defined “coordination” featuring on the conference agenda, which could easily be associated with ambitious international demand management, along the lines of the Bonn Summit agreements in 1978.

Tietmeyer pointed out that cooperation among the major industrial nations had in recent years extended beyond mere coordination of macroeconomic policies to such issues as trade, development and debt, energy, and structural policy. And according to Gyohten the coordinated adjustment efforts of the Group of Five or the Group of Seven since the Plaza Accord of 1985 seemed to have moved recently to a third stage, in which the emphasis was on structural measures aimed at securing lasting adjustment (whereas the main thrust had initially been on the realignment of exchange rates and then on macroeconomic policy coordination geared to a shift in growth patterns). The practitioners’ conception of a broad (and variable) scope of and for international cooperation was explicitly endorsed by various speakers from the academic world.

As far as the methods of international policy coordination are concerned, Niehans in his comments on the paper of Frenkel, Goldstein, and Masson examined the issue of rules versus discretion from a variety of aspects. On balance he opted for a limited number of simple rules on the international level that would allow national policymakers to use discretionary measures in the short run. His proposed macroeconomic coordination strategy relies on two basic (domestic) policy rules: the monetary rule of long-run price stability and the fiscal rule of long-run sustainability.

Not surprisingly, nobody had difficulties in accepting these basic long-term rules, but the question of how they should be implemented in the conduct of policy was raised in various respects. Tietmeyer stressed that rules needed to be sufficiently precise, that it mattered how they were defined and by whom. Branson pointed to the underlying analytical problem of the proposed fiscal rule by recalling the experience with the Reagan Administration’s tax cuts in 1981, which would not have been prevented by this sustainability rule as they had been expected to lead to an increase in tax revenue. Alexander Swoboda, for his part, reflected on the advisability of some modest contingency rules for the discretionary part of Niehans’ long-run scheme, possibly in the form of assignment rules à la Mundell-Fleming.

In connection with the discussion on rule-based versus discretionary forms of policy coordination, the classical issue of symmetry or burden-sharing was addressed by various speakers. It was pointed out, for example by Gyohten and Pieter Korteweg, that under the rules of Bretton Woods and the EMS the adjustment burden fell mainly on the deficit countries, whereas in the current discretionary coordination exercise among the Groups of Three, Five, or Seven, adjustment pressures seemed to be greater for the surplus countries, which are confronted with the threat of rising protectionism on their export markets and widespread international criticism.

This was seen in connection with the underlying structural asymmetry, that is, the great importance of the U.S. economy for the rest of the world on the one hand, and the small effects of economic performance and policies in the OECD partner countries on the United States and its external accounts on the other. As suggested by Groβer, this issue of underlying asymmetry no doubt deserves consideration in the debate on the appropriate mixture of rules and discretion in international policy coordination and in the work of economists in this field.

Quite apart from the very modest measurable gains to be achieved by economic policy coordination, many speakers had their doubts about the current practice of the major industrial countries in this field. They expressed concern about a possible delay of urgent policy action and the creation of unjustified expectations among the general public in connection with summit meetings. It was feared that useful “competition of policies” could be crowded out by negotiated coordination. Renate Merklein pointed to the risk that short-term-oriented politicians might be induced to take joint decisions that would prove harmful in the longer term. She questioned, for instance, the wisdom of lowering the savings rates in the surplus countries in the current coordination exercise and recalled Gottfried Haberler’s dictum that the world needs all the capital it can get.

Tietmeyer agreed that certain risks were involved in current international cooperation procedures, but at the same time he stressed the serious risks of noncooperation. The dialogue among the major countries on such issues as trade, agriculture, and the environment had helped to avoid bilateralism. Tietmeyer stressed that the Economic Summit was not a decision-making forum but could encourage new initiatives. In line with Shijuro Ogata, he felt that the yearly meetings provided the heads of state and government with a unique opportunity to focus their attention on problems in the international field that they did not normally deal with. The work on the decision-making level was carried out by the finance ministers and central bank governors of the five or seven major industrial countries, and the policies of the partner countries, for example in the fiscal field, had indeed been influenced by these international discussions. On the other hand, Tietmeyer did see room for improvement in cooperation procedures. To his mind, there should be less meetings, communiqués, and press conferences; it was the permanent work that was important.

The restriction of important decisions on international policy cooperation in the eighties to a small group of large industrial countries was mentioned with unease by several speakers. Polak raised the issue of the cost in terms of alternative solutions and expressed concern about the implications for the role of the IMF of the current, highly politicized, coordination by negotiation among half a dozen countries. He referred to the alternative approach of the Fund’s country-by-country annual consultations, which covered all countries and, fundamentally, amounted to a judgment on whether economic policies were internationally satisfactory. Although there was also a political element in these consultations, they were at least based on the nonpolitical input of the Fund’s staff. Polak felt that neither the international institutional approach nor the negotiations among a few major countries should be dispensed with entirely. But it was essential that a reasonable optimum be reached in the combination of the two endeavors. Failing serious efforts to this effect, there was a danger of the Fund’s role being undermined.

Günter Grosche joined Polak in emphasizing that the Fund is called upon to help out in the cooperation among member states. He pointed out that the Fund was entrusted, in the framework of its surveillance task, with the promotion of a stable system of exchange rates based on sound monetary and financial rules, and that it advised its members accordingly. The implementation of such policy advice required leadership and public support. He expressed the hope that the forthcoming Annual Meeting in Berlin would raise public awareness of the Fund’s role, not only in this issue, but also in international policy cooperation.

Conclusions

It is no easy undertaking to draw a few brief conclusions from the very rich and vivid discussion at our conference. All I will endeavor to do is to identify a few central points that seem of particular importance to me in the world of today.

• There was widespread, if not unanimous, agreement that the present situation of external and internal imbalances, particularly in the United States, has to be corrected and therefore does not provide a basis for any Bretton Woods-type or similar scheme of stabilizing real or nominal exchange rates. Such stabilization was not considered a primary goal of economic policy by any of the participants. This important conclusion of our conference was perhaps contrary to some expectations. On the other hand, most participants, in particular, central bankers and members of ministries of finance, expressed the view that it was essential to maintain orderly exchange markets and to stabilize the highly interdependent financial markets in general. Even those academics who favored a substantial further real depreciation of the dollar devoted a great deal of their thinking to the question how this correction could be smoothed or minimized. That is, of course, a much more limited endeavor than any Bretton Woods-type agreement.

• As to the policy instruments to be used to correct disequilibria and promote stable growth, there was widespread agreement that fiscal policy could not be dismissed, despite its rigidities. There was universal emphasis on the importance of supply-side policies, and the feeling prevailed that there was a clear need for courageous action in this field in a number of countries, in the Federal Republic of Germany in particular—but at the same time a certain amount of patience was required. In that sense the meeting differed in a very constructive way from some of the simplified discussions of the past on the responsibilities of surplus countries, in which it was said that these countries just had to grow faster by whatever means. It was generally accepted that there are no quick fixes in the present situation. That was not a spectacular conclusion, but an important one.

• On the highly topical subject of international policy cooperation and coordination, a very interesting result of our discussion was the clear dividing line drawn between the two terms. In sum there was great support for the concept of intensive cooperation and very little enthusiasm for coordination in the sense of macroeconomic fine-tuning, because it was generally felt that such coordination would not function well and was not even desirable. It was noteworthy in this context that all the government officials participating made it clear that their governments would not accept a system of quasi-automatic indicators obliging them to take specific macroeconomic action; the so-called objective indicators should be an analytical instrument and nothing more. Over-ambition in coordination could easily lead to disappointments and to the opposite of the desired results, namely, controversies between countries if the one tried to force the other into a position that was not in its “enlightened self-interest.” Thus, a valuable result of this conference was that the seeming contradiction between prominent experts, like Feldstein, who were on record as being against international cooperation and all those in favor was resolved in a pragmatic and sensible way. I think none of the participants disagreed that our world today would not be manageable without great efforts in international cooperation, but it seems equally true that there is still great room for improvement in these endeavors. One could quote Goethe’s Faust here: “Wer immer strebend sich bemüht, den können wir erlösen.”

• In my interpretation of our discussion, the other seemingly great difference between proponents of discretionary policy coordination and those arguing for a rule-based approach also turned out not to be so fundamental. When Niehans described his “rules,” which may also be regarded as policy goals—namely, monetary policy geared at price stability as the highest priority, avoiding inflation and deflation and fiscal policy following the same standard principles—the proponents of discretionary policies had no problems accepting that notion. As it turned out, the old slogan “stability begins at home” was not repudiated. There was general agreement that only governments that had achieved credibility on their home ground could engage in meaningful international cooperation.

At this point I wish to express my respect and admiration, and above all my gratitude, to all participants who through their astuteness, their vivid contributions, and, last but not least, their “discipline” made the conference such a pleasure to chair—and, I dare say, such a success. The organizers deserve great praise for assembling such an ideal mixture of professors, academics of the highest caliber, Fund officials, government officials, central bankers, journalists, and some free-lance people, if I may call them that, plus bankers like myself. Given this representation, we can claim in all modesty that we covered a very broad spectrum of today’s thinking.

Needless to say, none of us entertained the illusion that we would arrive together at the clear-cut and perfect solutions to pending problems that had eluded others up to then; that was not the purpose or the ambition of the conference. But let me nevertheless express my belief that the conference made a valuable and constructive contribution to an important ongoing debate.