We are yet to see how much the world's economists and politicians have learnt from the global financial crisis and the recession it precipitated. The test will be the extent to which they actually tighten the regulation of their financial systems.
One risk is that economists will remain locked in their old beliefs, reluctant to admit they've been found wanting.
Another is that banks and financial firms have become so politically powerful they will successfully resist the introduction of changes that could reduce their freedom of action and profitability.
But one formerly doctrinaire outfit that's proved surprisingly willing to adjust its thinking to the new realities is the International Monetary Fund.
The first surprise was the alacrity with which the fund urged its member countries to respond to the crisis with lashings of fiscal (budgetary) stimulus. Until now, the use of fiscal policy for short-term demand management has been deeply unfashionable.
The second surprise was a paper written by the fund's chief economist, Olivier Blanchard, suggesting that countries lift their inflation targets from 2 per cent to 4 per cent to give themselves more room to cut nominal interest rates during recessions. This idea hasn't gone down well. Lifting inflation targets could weaken the central banks' credibility as inflation fighters, causing inflation expectations to drift higher than 4 per cent. And the main reason the North Atlantic central banks didn't have much room to cut their interest rates was that they'd been holding them too low for too long (a contributory cause of the crisis).
In any case, the problem doesn't apply to us. Our nominal rates are invariably higher than the major economies' rates, and after we'd slashed our official interest rate by 4.25 percentage points, we still had 3 percentage points to play with. As well, the fact that most of our mortgages have variable rather than fixed interest rates gives our central bank much more effective control over the rates households actually pay. The more effective your instrument is, the less you have to move it.
And now the third surprise from the fund is a staff paper accepting that ''emerging market economies'' may be justified in imposing controls on capital inflows.
Formerly, the fund had been active in urging emerging economies to open up the capital accounts of their balance of payments, allowing financial capital to flow freely in and out. It disapproved of capital controls, advancing the contradictory arguments that they distorted the allocation of resources and were ineffective.
But now the fund seems to have learnt something. It accepts that with interest rates likely to stay low in the ailing North Atlantic economies, but rates likely to be high in the healthy emerging economies, there could be a lot of potentially destabilising money sloshing into Asia and elsewhere in search of a quick quid.
The fund's empirical research suggests that those emerging economies with controls on capital inflows tended to suffer less in the latest crisis. Controls don't seem to reduce total inflows so much as improve their composition, reducing the share of short-term debt capital (''hot money'') and increasing the share of long-term equity capital (''foreign direct investment'').
The paper argues that countries with excessive temporary inflows should respond first by allowing their exchange rates to appreciate, allowing their foreign exchange reserves to build up and using open-market operations (sales from the central bank's stock of second-hand government bonds) to mop up (''sterilise'') the inflowing foreign money.
Next, countries could loosen monetary policy to lower interest rates (thus discouraging foreign inflow) and tighten fiscal policy (to reduce upward pressure on the exchange rate). But when all these avenues have been exhausted then, yes, it's OK to impose direct controls on capital inflows.
This concession takes us in the direction of something that's similar but not the same: a Tobin tax. This is the proposal by the Nobel Prize-winning American economist James Tobin that a very tiny tax be imposed on all foreign exchange transactions.
Its purpose would be to reduce the volatility of capital flows and floating exchange rates by discouraging (making unprofitable) the most speculative, short-term money flows without discouraging the longer-term, more obviously beneficial investment flows.
It's a tacit acknowledgement that a lot of foreign exchange transactions aren't based on ''the fundamentals'' as textbooks assume, but on momentum trading (buy what's going up, sell what's going down) and other herd behaviour. Such herd behaviour causes exchange rates to ''overshoot'' in either direction, and there's no economic gain from overshooting.
It's an idea that's been around since the 1970s, but it's been given a new lease on life by the financial crisis and is now being championed by another Nobel Prize winner, Paul Krugman.
I think it's a good idea. It would do some good and little harm. Most of the arguments against it are exaggerated.
But the idea has become politicised and, in any case, will be bitterly opposed by the banks and other institutions that do the speculating or, more likely, make their money clipping the tickets of the speculators.
