Can someone explain Lagarde’s recent comments?

Here is Robin Harding at the Financial Times, discussing the views of IMF president Christine Lagarde:

The global economy is experiencing “transitions on an epic scale”, the International Monetary Fund managing director said on Thursday, warning that turbulence in emerging markets could knock 0.5 to 1 percentage point off their growth.

Christine Lagarde’s remarks show the damage done to emerging markets by a recent round of “taper talk”, over the possibility of the US Federal Reserve slowing the pace of its asset purchases and their vulnerability to future changes in the pattern of global capital flows.

“The immediate priority is to ride out the turbulence as smoothly as possible,” said Ms Lagarde. “Currencies should be allowed to depreciate. Liquidity provision can help deal with dysfunctional market behaviour. Looser monetary policy can also help.”

But she warned that countries with inflationary pressures – such as Brazil, India, Indonesia and Russia – have less scope to use monetary policy and that high debt and deficits mean many developing countries have little space for fiscal stimulus either.

I honestly have no idea what she is talking about.  Or more precisely, certain paragraphs seem to have one implication (not enough AD in the developing world) and other paragraphs seem to flatly contradict that interpretation (too much inflation.)  Taken literally, she seems to imply that places like Brazil, India, Indonesia and Russia are in better shape than most, but the clear implication of the remarks is exactly the opposite.  So I need someone with fresh eyes to tell me what she is saying here, preferably using language such as AS/AD, or NGDP/RGDP.  What precisely is the problem?

Even if you prefer to talk about other topics, say capital flows, I’d like to know how they impact RGDP/NGDP or AS/AD.  It helps me to understand what people are assuming when they make claims that monetary stimulus will or will not make things better.

PS.  I’m not claiming there is no problem here, I assume there is.  I simply don’t understand what it is.



25 Responses to “Can someone explain Lagarde’s recent comments?”

  1. Gravatar of Daniel J Daniel J
    4. October 2013 at 09:24

    I don’t agree with her but I would read it as Russia, Indonesia, India and Brazil will experience stagflation if the central bank attempts to increase AD. What they could use at this point is a depreciation, which will continue assuming capital outflows will continue, and liberalization of their economies, thus boosting AS.

  2. Gravatar of Daniel J Daniel J
    4. October 2013 at 09:26

    Who knows, maybe Raghuram Rajan will turn out to be the Paul Volcker to Rahul Gandhi’s Ronald Reagan. However I heavily doubt this. Would be good for India though.

  3. Gravatar of TravisV TravisV
    4. October 2013 at 09:27


    Is Krugman right about this?????

    “My bet now is that we actually do go over the line for a day or two. And what ends the immediate crisis is not Republican action but a decision by Obama to declare himself not bound by the debt ceiling. He can’t even hint at this possibility until the thing actually happens, because he has to keep the focus on the Republicans, and he has to make them demonstrate their utter irresponsibility before he can take any extraordinary action.

    But maybe I’m wrong; maybe Obama’s lawyers have concluded that there’s really nothing he can do. If so, God help us all.”

  4. Gravatar of anon anon
    4. October 2013 at 10:11

    “Even if you prefer to talk about other topics, say capital flows, I’d like to know how they impact RGDP/NGDP or AS/AD.”

    Capital flows “impact” AD whenever central banks respond to “fear of floating” concerns. Many emerging countries have this particular issue. I don’t understand fear of floating all that well. Some folks argue that moderating exchange rate movements makes cross-border capital flows less risky (by removing exchange rate fluctuations as a source of risk), which is supposed to boost long-run growth. I think this is quite confused, but if you start from the assumption that central banks are going to behave like that, then Lagarde’s remarks might make sense at some level.

  5. Gravatar of Jason Jason
    4. October 2013 at 10:19

    My best guess (regarding monetary policy) is she is saying that there will be AD shortfalls and some countries with low inflation can tolerate more inflation to return to trend without letting expectations become unanchored but countries with a recent history of inflation (Brazil, Russia, etc) should (wink wink) take advantage of the AD shortfall to reign in inflation expectations.

  6. Gravatar of TravisV TravisV
    4. October 2013 at 11:19


    The Fed must do “whatever it takes” to lower the unemployment rate!

    Remember when Draghi said that in July 2012?

  7. Gravatar of TravisV TravisV
    4. October 2013 at 11:35

    Ron Paul on Sunday:

    “At some point the Fed’s policies will result in hyper-inflation”

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. October 2013 at 12:17

    ‘Is Krugman right about this?????’


    The financial markets are yawning. Maybe because this ‘crisis’ is nothing new, as Kevin Hassett makes clear;

    Obama is too fragile a flower to be exposed to politics as usual.

  9. Gravatar of TravisV TravisV
    4. October 2013 at 12:54

    Patrick R. Sullivan,

    I don’t understand what you’re saying. Are you predicting that the Republicans in Congress will give in on October 20th or sometime before?

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. October 2013 at 13:03

    The entire speech is here:

    I am not sure there is any underlying consistency. Not helped by the fact she has to be compulsorily polite.

  11. Gravatar of ssumner ssumner
    4. October 2013 at 16:07

    Daniel, I’m afraid that doesn’t help me. Depreciation is monetary stimulus. It leads to inflation. I still see a conflict.

    anon, Good point.

    Jason, But it seems like she fears those countries will be hurt more than other developing countries, even though I agree with your argument that the logic of her discussion implies they’ll be hurt less.

    Travis, Even I wouldn’t go as far as Kocherlakota.

    Patrick, I agree with Grover Norquist.

    Thanks Lorenzo.

  12. Gravatar of John John
    4. October 2013 at 16:26


    It seems pretty clear that she is implying (correctly in my opinion) that the BRICs should clamp down on inflation and bring the rate down to 1-3% before and NGDP to around say 10% for China and 5% for Brazil, Russia, and India. Supply side policies could probably do this by itself by pushing more of the nominal growth into real growth rather than inflation but that is outside of the control of central bankers. Central bankers have to exclusively focus on keeping NGDP/inflation on target.

    Do you believe that it’s ever necessary to induce a recession to reduce inflation like the U.S. did in 1983 or 1920? It seems like getting inflation or NGDP back to reasonable levels can be quite painful and a lot of central bankers don’t have the stomach for it.

  13. Gravatar of Mike Mike
    4. October 2013 at 17:53


    Shes just a politician. Dont take her too seriously or read into what she is saying.

  14. Gravatar of edeast edeast
    4. October 2013 at 19:02

    Ssumner; emh and twitter ipo? lookalike mix up,

  15. Gravatar of Steve Steve
    4. October 2013 at 19:16


    TWTRQ appreciated from $200k to $1-2mm. Limits to arbitrage, not shortable, etc. This stuff happens all the time.

  16. Gravatar of Steve Steve
    4. October 2013 at 19:18


    The are worthless stocks with $300mm market caps, too. Same problem, not shortable, gets news media publicity, price spikes. People like to trade worthless (or severely negative expectation) pieces of paper. Just ask the lotto.

  17. Gravatar of Rajat Rajat
    4. October 2013 at 20:04

    I guess she is saying that some countries have weak NGDP at the moment and for those, tighter US monetary policy should be offset with domestic loosening and depreciation. But the BIIR countries need to face some pain and should allow their currencies to rise a bit (on a trade-weighted basis) with the USD to do some of the job for them. Of course, then the proximate cause of slower NGDP will be the taper rather than an explicit domestic decision. This has both advantages (can blame the US for their probs) and disadvantages (consequent slowdown won’t help build local CB credibility).

  18. Gravatar of Joe Eagar Joe Eagar
    5. October 2013 at 02:00

    Why are we assuming that Lagarde is talking about AD-driven inflation? Isn’t she just referring to a lack of policy credibility, possibly coupled with supply-side inflationary pressures? E.g. governments that lack credibility where inflation is concerned have to be more careful in their conduct of monetary policy.

  19. Gravatar of ssumner ssumner
    5. October 2013 at 03:56

    John, I’m glad it’s clear to you, I don’t get that message at all. It seems to me she is saying the BRICS are being hurt by tapering.

    Rajat, I suppose that’s possible. But she has a strange way of making the point.

  20. Gravatar of Robert Robert
    5. October 2013 at 05:09

    I think she is working with a Swan diagram – hence the comments about India, Indonesia, inflation, deficits, and lack of room for fiscal stimulus.

  21. Gravatar of B… B...
    5. October 2013 at 08:07

    BRICS are not the same as the countries listed in the quote. She is saying that these countries are being harmed by (anticipated) tapering. This is because of the downward impact of capital outflows on their currencies. Combined with the high CA deficits in some, this is unhelpful for inflation. Of the debt she speaks of, a significant proportion in some developing markets is external, and in many cases a significant proportion is dollar or euro denominated, so depreciating currencies are not helpful here either.

  22. Gravatar of Ralph Musgrave Ralph Musgrave
    5. October 2013 at 09:04

    Bill Mitchell of “Billyblog” fame has claimed for a long time that the IMF and OECD are so incompetent they should be closed down.

  23. Gravatar of ChrisA ChrisA
    5. October 2013 at 17:56

    Lagarde is where she is not because of her insights into monetary policy or her ideas on how to manage large economies, but because she has demonstrated ability as a high level bureaucrat, essentially ensuring that the institutions she is working for look ok and don’t rock the boat. Now she is in a more leadership position she has to make speeches on policy, but she doesn’t have any particularly strong views (if she did she wouldn’t be where she is now) so she asked her staff to come up with something that the aggregate policy maker thinks based on chatting to others of a similar type. Basically one on the one versus the other hand stuff. On average we probably want high level bureaucrats to be like this, too much radicalism is just as bad as too little. Scott, your ideas look great to me, but we all know in history how some ideas that looked really good turned out not to be so, so we should welcome the fact that policy makers are really slow to pick up new ideas.

  24. Gravatar of ssumner ssumner
    6. October 2013 at 05:24

    Robert , What is a swan diagram?

    B, That doesn’t really help me. What is the effect in terms of AS/AD, or RGDP/NGDP?

    Ralph, I’m fine with that.

    Chris, Good point, but of course it doesn’t answer my question. Unless you are simply saying it’s a bunch of nonsense.

  25. Gravatar of B… B...
    8. October 2013 at 15:17

    Inflation / weaker currencies – the CA deficit markets mentioned need to import oil and other commodities but can only pay with depreciated currency. Energy prices have risen concurrently on geopolitical risk. Demand lower, rdgp lower. Ngdp depends on the degree to which rgdp is offset by higher inflation.

    External debt, local ccy denominted – debt maturing near term, lender recieves local ccy and sells to recieve hard ccy. This exacerbates local ccy depreciation and associated effects in para above on rgdp and ngdp.

    External debt, dollar demoninated – depreciated local ccy which is servicing the debt implies higher default risk. rgdp lower, ngdp lower.

    If that didn’t help either perhaps you could expand a little on why you believe the issues need to be framed in ngdp / rgdp for you to recognise them.

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