Global stability: risks and remedies

The Review is pleased to give hospitality to CLARE Group articles, but is not necessarily in agreement with the views expressed. Members of the CLARE Group are M.J. Artis, T. Besley, A.J.C. Britton, W.J. Carlin, J.S. Flemming, C.A.E. Goodhart, J.A. Kay, R.C.O. Matthews, D.K. Miles, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent, M.Fg. Scott, P. Seabright, Z.A. Silberston, S. Wadhwani and M. Weale. Drafts of this article have been discussed among members of the Group, but responsibility for the views expressed rests with the authors alone. In the last few years the stability of the world economy has rested upon a prolonged boom in the USA offsetting recession in Japan and a slowdown in other East Asian 'tiger' economies. The risk now has to be faced that, if the 'bubble' in the US stock market should burst, recessionary influences would spread throughout the OECD area and beyond; and this could happen at a time when the conventional wisdom has lost faith in the effectiveness of 'reflationary' monetary and fiscal policies. After re-examining the case for deploying such policies as a positive response to recession, the authors first ask how the rules guiding monetary policy should be amended to reduce the probability of recession, and to counter it if it develops. They then consider the possibilities for fending off or mitigating recession by use of fiscal measures. They conclude by calling for public discussion of the policy issues involved as a basis for the formulation of contingency plans against the non-negligible risk that the balance of the world economy could before long be tilted in a recessionary direction.