andrea bubula - changes in macroeconomic policies in the u.s. - effect on less developed...

8/14/2019 Andrea Bubula - Changes in Macroeconomic Policies in the U.S. - Effect on Less Developed Countries.pdf

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Changes in Macroeconomic Policiesin the U.S.

Effects on Less Developed Countries

Andrea BubulaIlia State UniversityOctober 31, 2013


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Agenda

The Financial Crisis

Policy Response and Challenges

The U.S. Government Debt Ceiling

Effects on Less Developed Countries


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The Financial Crisis

GDP = Consumption + Investment + GovPurchases + Net Exports

Contraction in HousingPrices, Wealth, and Credit

Availability.

Increase in Risk Perception

CGDP

IGDP

Production

GDP = C + I +G + NX


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The Propagation of theFinancial Crisis

Shocks inCredit

Markets

GDP Dropin the U.S.

Decline

in U.S.Imports

Propagation to the

Rest of the World

Major Increase in UnemploymentRate

Drop inHousingPrices

Reduced LaborMobility


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Real GDP Growth Rate

FRA GER GRE IRE ITA JAP GEO ESP U.K U.S.

90-07 1.95 1.93 2.89 5.87 1.49 1.48 6.91 3.14 2.81 2.91

2008 -0.08 0.80 -0.16 -2.11 -1.16 -1.04 2.31 0.89 -0.97 -0.34

2009 -3.15 -5.07 -3.25 -5.46 -5.49 -5.53 -3.78 -3.74 -3.97 -3.07

2010 1.66 4.02 -3.52 -0.77 1.80 4.53 6.25 -0.32 1.80 2.40

2011 1.69 3.10 -6.91 1.43 0.43 -0.76 7.17 0.42 0.76 1.81

2012 0.12 0.94 -6.00 0.35 -2.29 2.22 6.12 -1.54 -0.38 2.17


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GDP per Capita at ConstantPrices (2000 = 100)


2008 107.4 111.4 130.0 119.0 103.0 108.1 181.2 112.7 116.9 108.7

2009 103.5 106.1 125.5 111.6 96.6 102.1 174.2 107.7 111.5 104.5

2010 104.7 110.5 120.8 110.5 97.9 106.8 183 107.0 112.7 106.1

2011 105.9 113.9 112.4 109.3 97.9 106.1 195 107.3 112.8 107.3

2012 105.5 115.0 105.5 110.0 95.2 108.7 205 105.3 111.6 108.8

As in 2004 2001 2003 1998 2006 2004 2005 2006


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Employment and theUnemployment Rate in the U.S.

126,000

128,000

130,000

132,000

134,000

136,000

138,000

140,000

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

unemployment employed


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What Explains the Increase inthe Unemployment Rate?

Cyclical

Factors

Need for aStimulus

StructuralFactors

More

DifficultCorrection


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Conventional MonetaryPolicy Instrument

Fed

Loans toBanks

LiquidityProvision

Federal

Funds Rate

MoneyMarket Rate

Long TermRates


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Unconventional Monetary Measures:Quantitative Easing and Forward Guidance

Fed

New Types ofLoans Liquidity

Provision

Federal FundsRate

Money MarketRate

Long TermRates


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Fiscal Policy Response

GOAL:Stimulate Spending, GDP, and Employment

INSTRUMENTS:

Cut in Taxes and Increase in GovernmentSpending

C + I + G + NXGDP

POLICY:The American Recovery and Reinvestment Act

(2009)


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Government Budget Balance:Revenues - Spending


2008 -3.3 -0.1 -9.9 -7.3 -2.7 -4.1 -1.98 -4.2 -5.1 -6.7

2009 -7.6 -3.2 -15.6 -13.9 -5.4 -10.4 -6.54 -11.2 -10.4 -13.3

2010 -7.1 -4.1 -10.5 -30.9 -4.5 -9.4 -4.78 -9.4 -9.9 -11.2

2011 -5.2 -0.8 -9.1 -12.8 -3.8 -9.8 -0.87 -8.9 -8.5 -10.1

2012 -4.7 -0.4 -7.5 -8.3 -2.7 -10 -0.76 -7 -8.2 -8.7


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Government Net Debt


2008 62 50 113 25 89 95 28 31 46 54

2009 72 57 129 42 97 106 37 42 61 66

2010 76 56 145 75 99 113 39 50 71 73

2011 79 55 165 95 100 126 34 57 77 80

2012 84 58 171 103 103 135 32 79 84 84


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Risk of Explosive Dynamics

Low GDP Growth

High Initial Government Debt

Foreign Ownership of Debt could Aggravate

High Interest RateProspective of Uncontrolled Spending

Self-Fulfilling Prophecies

Weak Points:

n

tnt

nt

growthGDP

DebtCurrentdeficitsprimaryfuture

GDP

Debt

)1(

interest)1( n


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0.00

1.00

2.00

3.00

4.00

5.00

6.00

2005-08-01

2005-11-01

2006-02-01

2006-05-01

2006-08-01

2006-11-01

2007-02-01

2007-05-01

2007-08-01

2007-11-01

2008-02-01

2008-05-01

2008-08-01

2008-11-01

2009-02-01

2009-05-01

2009-08-01

2009-11-01

2010-02-01

2010-05-01

2010-08-01

2010-11-01

2011-02-01

2011-05-01

2011-08-01

2011-11-01

2012-02-01

2012-05-01

2012-08-01

2012-11-01

2013-02-01

2013-05-01

2013-08-01

Nominal Rate on 10-Year onU.S. Government Bonds


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Why has the U.S. GovernmentBorrowing Rate fallen?

U.S.Governmentdefault risk

has not

increased

MonetaryPolicy in theU.S. has

kept interest

rates low

Crisis in the

Eurozone:U.S.

GovernmentBonds are a

safe haven


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Effects of lower interest rates inthe U.S. on Emerging Markets

Assets from Non-crisis EMs become more attractive

Significant Capital Inflows to Emerging MarketsDanger of Capital Inflows:Currency AppreciationIncrease the Price of Non-Traded Goods

Could lead to InflationFeed a Real Estate BubbleMakes the EM borrow from abroad

C S


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Fiscal Correction in the U.S. :Tax Increases and Government

Spending Cuts

To Avoid aDebtCrisis

Need for aFiscal

Correction


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Fiscal Policy Challenges (1)

A fiscal correction would GDPin the present, worsening theunemployment situation and

even the government defaultrisk

The fiscal correction would causean increase in saving, investment

and GDP in the future


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Fiscal Policy Challenges (2)

The fiscalcorrectioncannot be

frontloaded

Need amedium-run

trajectory

Reducingpolicyuncertaintyis essential


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The aftermath of October 2013Worries about a rerun in February 2014?

What spending to cut? The role of lobbies.

Will the $ and U.S. assets lose their hegemony?

Threat of ratings downgrade

The role on foreign holders of U.S. assets: China andJapan

The job of world reserve currency is too big for the U.S. toshoulder alone.


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The Costs of the Fiscal Crisis:.6% of GDP

ReputationalCosts

Increase inPolicy

Uncertainty:C and I

GDP

Reduction inConsumersConfidence:C GDP

ShuttingDown Ports: economicactivity

GDP

StoppingExport

financingand importinspections:

GDP


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The effects of higher interest rates in theU.S. on Emerging Markets (1)

Scenario 1 (most likely):The risk on U.S. assets does not increase

Given that risk-free assets pay more, EM assets becomeless attractive.

Capital outflows from Emerging MarketsCould be destabilizing:Depreciated CurrencyHigher interest rates

Less C, I and GDPMay 2013: Mini Crises in Brazil, India, Indonesia, South

Africa and Turkey


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The effects of higher interest rates in theU.S. on Emerging Markets (3)

Scenario 3 (least likely):The risk on U.S. assets increases significantly

Strong Contraction in U.S. GDP

Significant reduction in world trade

Financial Crisis that will reduce the supply of credit globallyand may likely cause a capital outflows from Ems.


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