The IMF is turning economic orthodoxy on its head in the wake of the Global Financial Crisis, and is calling for the overthrow of inflation targeting as the central goal of economic management. It says inflation should be allowed to rise to 4% to give Govts more chance of managing downturns. It says too much reliance has been placed on interest rates to control economies, and budget spending and direct regulation of banks should play a greater role.

The IMF says cash hand-outs, like those made by the Aust Govt in the wake of the financial crisis, should be made automatically when unemployment rises. The fund’s chief economist, Olivier Blanchard, says while economic policy makers did not cause the crisis, they were “lulled into a false sense of security by the apparent success of economic policy ahead of the crisis,” and it is now time for a reassessment of how to conduct macroeconomic policy.

The Fund says higher inflation targets should be accompanied by indexation of personal income tax brackets. The Fund says although the aggressive budget stimulus… packages implemented around the world are justified by the severity of the crisis, they are less suitable for “normal” economic fluctuations. However, it believes there’s a case for automatic measures, such as tax credits or cash hand-outs to low-income people, which would be triggered by rising unemployment.

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