a broad view of macroeconomic stability josÉ antonio ocampo under-secretary-general united nations
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A BROAD VIEW OF MACROECONOMIC STABILITY
JOSÉ ANTONIO OCAMPOUNDER-SECRETARY-GENERAL
UNITED NATIONS
A BROAD VIEW OF A BROAD VIEW OF MACROECONOMIC STABILITYMACROECONOMIC STABILITY
Not only inflation and fiscal balance, but also: Economic activity and employment External sector balance Balance sheets of financial and non-financial agents
Counter-cyclical macroeconomic policies are key So, need to go beyond “inflation targeting”: Output
and real exchange targeting, additional instruments… …and supportive international financial institutions
MACROECONOMIC (IN)STABILITY (1)MACROECONOMIC (IN)STABILITY (1)
Markets are inherently unstable This is partly a question of price and wage
“rigidities”… …but particularly of the functioning of financial
markets (risk/information asymmetries generate inherently incomplete markets): Alternation of high “risk appetite” and “flight to
quality” Rationing of credit, particularly during downturns Contagion
MACROECONOMIC (IN)STABILITY (2)MACROECONOMIC (IN)STABILITY (2) For developing countries: strong cyclical swings and pro-
cyclical macro policies This reflects inherent asymmetries of the international
system: Different capacity to issue debts in domestic
currencies Degrees of financial market development Size of markets
Features of financial cycles: Variations in availability, price and maturities Short-term but, particularly, medium-term fluctuations
Self-insurance is possible but costly
UNSTABLE ACCESS TOEXTERNAL FINANCING…
(20)
20
60
100
140
180
22019
80
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Bill
ions
of d
olla
rs
Net direct investment
Net private capital flows
… … AND VOLATILE SPREADSAND VOLATILE SPREADS
Spreads on JP Morgan EMBI Global and US High-Yield Bonds October 1994 to June 2006
0
200
400
600
800
1000
1200
1400
1600
1800
Oct-94
Feb-9
5
Jun-
95
Oct-95
Feb-9
6
Jun-
96
Oct-96
Feb-9
7
Jun-
97
Oct-97
Feb-9
8
Jun-
98
Oct-98
Feb-9
9
Jun-
99
Oct-99
Feb-0
0
Jun-
00
Oct-00
Feb-0
1
Jun-
01
Oct-01
Feb-0
2
Jun-
02
Oct-02
Feb-0
3
Jun-
03
Oct-03
Feb-0
4
Jun-
04
Oct-04
Feb-0
5
Jun-
05
Oct-05
Feb-0
6
Jun-
06
Bas
is P
oin
ts
EMBI/EMBI Global
US High-Yield Bonds
Pre-Asian Crisis EM Spreads
Asian Crisis
Source: ECLAC, on the basis of data from Merrill Lynch's U.S. High-Yield Master II Index (H0A0), and JP Morgan's EMBI (until November 1997), and EMBI Global (from December 1997 to June 2006).
Mexican Crisis
MACRO POLICIES:MACRO POLICIES:THE EXCHANGE RATE REGIME (1)THE EXCHANGE RATE REGIME (1)
With trade and capital account liberalization, loss of policy instruments to manage shocks.
Thus, greater reliance on exchange rate… … but exchange rate fluctuations have a
counter-cyclical trade but pro-cyclical wealth effects…
… and are subject to conflicting demands: Demand for stability (price stability, stable
trade incentives, avoiding pro-cyclical wealth effects)
Demand for flexibility (room of maneuver to manage shocks)
MACRO POLICIES:MACRO POLICIES:THE EXCHANGE RATE REGIME (2)THE EXCHANGE RATE REGIME (2)
An adequate management of the exchange rate regime must recognize the multiple objectives of macroeconomic policy…
…which implies that some degree of exchange-rate targeting is essential…
…and is the normal policy option
THE TRADITIONAL VIEW:THE IMPOSSIBLE TRINITY
Figure 2
C
BA
Capital mobility
Autonomyto manage
exchange rates
Autonomyto manage
interest rates
PROBLEMS WITH PROBLEMS WITH THE TRADITIONAL VIEWTHE TRADITIONAL VIEW
“Credibility” of pegs (even hard pegs) vary and are pro-cyclical, thus making this instrument more procyclical in developing countries.
“Monetary autonomy” under flexible exchange rates is also limited: Pro-cyclical wealth effects. Supply effects of exchange rates on domestic prices Endogeneity of capital flows.
So, the room for monetary autonomy may be greater under “intermediate regimes”, but: Effective capital account regulations are key Costs of counter-cyclical reserve management Credibility issues
MACRO POLICIES:MACRO POLICIES:FISCAL POLICY (1)FISCAL POLICY (1)
Fiscal policy can always play a counter-cyclical role. But markets push it in a different direction:
Taxes, financing and debt service are procyclical Contingency financing is also procyclical.
And there are political-economy arguments that push in the same direction: Compensating pro-cyclical booms of private spending
is politically difficult If there was austerity during the preceding crisis, it is
also difficult to justify it during booms Procyclical fiscal policy has adverse effects on the
efficiency of public sector spending and on growth.
PROCYCLICAL POLICIESPROCYCLICAL POLICIES
REGIONCYCLICALITY OF
FISCAL POLICY (INDEX)
OECD - 0.11 (countercyclical)
High-to-Middle Income Developing Countries
0.28 (highly procyclical)
Middle-to-Low Income Developing Countries
0.17 (moderately procyclical)
Low-Income Countries 0.28 (highly procyclical)
Africa 0.30 (highly procyclical)
Latin America 0.25 (highly procyclical)
Asia 0.16 (moderately procyclical)
Pro-cyclical macroeconomic policy in developing countries has been harmful for growth
Pro-cyclical fiscal policies negatively affect long term-growth
Unstable public spending have negatively affected investments in infrastructure and human development
MACRO POLICIES:MACRO POLICIES:FISCAL POLICY (2)FISCAL POLICY (2)
Policy options: Define a structural stance of the public sector. Actively use stabilization funds Automatic stabilizers (spending or taxes) may be
preferable to discrete decisions.
CAPITAL MANAGEMENT:CAPITAL MANAGEMENT:CAPITAL ACCOUNT REGULATIONS (1)CAPITAL ACCOUNT REGULATIONS (1)
Second best intervention: segment what is already segmented.
Traditional regulations: segment according to residents and non-residents, and existing economic links.
For countries already integrated in to world capital markets: Temporary administrative controls (Malaysia,
1994 and 1998) Price-based regulations (Unremunerated
Reserve Requirements, URR).
CAPITAL MANAGEMENT:CAPITAL MANAGEMENT:CAPITAL ACCOUNT REGULATIONS (2)CAPITAL ACCOUNT REGULATIONS (2)
Lessons from experience: Both controls on outflows and inflows can work,
but quantitative restrictions may be easy to administer
Dynamic adjustment is necessary to close loopholes, and in any case regulations are “leaky”
Traditional controls work better if the objective is to reduce procyclical flows.
Quantitative controls have stronger effects… … but price-based regulations are also effective Capital account regulations are a complement, not
a substitute of adequate macro policy
THE EFFECT OF CAPITAL-ACCOUNT REGULATIONS
Inflows
Interest rate spread(i - i* + e)
i: Domestic real interest ratei*: External real interest ratee: Annual variation of of the real exchange rate
A
B
C
CAPITAL MANAGEMENT:CAPITAL MANAGEMENT:MACRO-PRUDENTIAL REGULATIONSMACRO-PRUDENTIAL REGULATIONS
Risks that financial sector faces have a large macroeconomic component: Financial markets are pro-cyclical Traditional regulation have a pro-cyclical bias Price-sensitive risk management is also pro-cyclical.
Essential tools: Forward-looking provisioning (rather than capital) Discretionary prudential provisioning, based on
growth of credit (general, by sector, by agent) Regulation of maturity and, particularly, currency
mismatches. Valuation of collaterals.
CAPITAL MANAGEMENT:CAPITAL MANAGEMENT:PUBLIC SECTOR LIABILITY MANAGMENTPUBLIC SECTOR LIABILITY MANAGMENT
Maturity of domestic liabilities of the public sector matter.
Avoid dollar/euroization of domestic liabilities
Counter-cyclical swings between domestic and external financing.
INTERNATIONAL COOPERATIONINTERNATIONAL COOPERATION
The room of maneuver for counter-cyclical policies should be at the center
Surveillance to avoid building up unsustainable dynamics.
Smoothing financing at the source IFIs as “market makers” for counter-cyclical
instruments Counter-cyclical financing.