Posted on November 30, 2009 by iMFdirect
By Olivier J. Blanchard
We celebrated the 10th anniversary of the IMF’s research conference with an outstanding group of presenters and a record number of participants. The main topic of this year’s conference was “Financial Frictions and Macroeconomic Adjustment.”
Two days of scholarly exchange among researchers and policymakers focused on various themes related to the crisis. I’ve summarized here some of these themes along with their implications for future research.
1. Household leverage played a critical role in shaping the dynamics during the current U.S. recession. The first paper of the conference provided convincing evidence that the U.S. counties where household leverage had grown the most during the boom were also the ones that experienced the largest busts as measured by home prices, defaults, auto sales, and unemployment. Future research should focus on the policy implications of these findings, especially in the context of the role of monetary policy in mitigating the adverse effects of asset bubbles.
Filed under: Economic Crisis, Economic research, IMF | Tagged: balance sheet adjustment, debt overhang, global banks, household leverage, macrofinancial linkages, Olivier Blanchard, Ricardo Caballero | Leave a Comment »
Posted on November 23, 2009 by iMFdirect
By Carlo Cottarelli
As world leaders gather in Copenhagen, climate change is again in the headlines. The science of the issue can get pretty incomprehensible pretty quickly. And the politics are clearly very ugly. Let’s not forget, however, that much of the economics is simple.
It’s an externality, stupid—so price it
Climate change is an “externality” problem. Individuals, firms, and, yes, governments, do not take full account of the harm that others suffer when they emit greenhouse gases. So they emit too much. And the best way to stop them doing this is to charge them a price for the carbon content of what they emit: a “carbon price.”
Admittedly, climate change is a particularly complicated externality. Since the damage will fall largely on future generations, the proper price depends very much on how we value their well-being relative to ours. The importance of such long-lived investments as power-stations, and the heavy sunk costs of investing in new technologies, mean that the carbon prices people expect in the future are even more important than the price now. And the fact that the world’s supply of fossil fuels is ultimately fixed means that the effect of carbon prices on total emissions is not as clear cut as it may seem.
Emission reductions solely by those countries historically responsible for the accumulated stock of emissions will not come close to solving the climate problem (photo: Newscom)
Filed under: Economic Crisis | Tagged: cap and trade, carbon, carbon price, Climate change, Copenhagen, greenhouse gases, oil | 6 Comments »
Posted on November 20, 2009 by iMFdirect
By Carlo Cottarelli
Health spending in OECD countries increased from 4½ percent of GDP in 1960 to 12½ percent in 2007 (see Figure 1 below). What accounts for this dramatic increase? Income growth, insurance, demographics, and technological change all contributed, but the latter was the key driver. Public spending for health care also increased sharply (by 5½ percentage points of GDP) during this period (see Figure 2).
Filed under: Advanced Economies, Economic Crisis | Tagged: demographics, fiscal sustainability, health spending, income growth, insurance, U.S. budget | 3 Comments »
Posted on November 18, 2009 by iMFdirect
By Carlo Cottarelli
As I noted in my last post, government deficits in many countries—particularly in advanced countries—have jumped dramatically in the wake of the global crisis, and government debt has reached levels that could jeopardize longer term macroeconomic stability and growth. These countries will need to tighten fiscal policy significantly sometime down the road, especially where demographic trends are pushing up health and pension spending.
But fiscal deficits cannot be lowered in the immediate future. For the time being, fiscal (and monetary) policies must continue to support economic activity. The economic recovery is uneven and could be threatened by any premature withdrawal of policy support. Private demand is still unable to stand on its own two feet.
This gives rise to a policy conundrum. How can we reconcile the competing requirements of short-term support for the economy and longer term fiscal solvency?
Filed under: Advanced Economies, Economic Crisis, Fiscal Stimulus, growth | Tagged: exit strategies, fiscal policy, fiscal solvency, fiscal transparency, government debt, government deficits, retirement age | 3 Comments »
Posted on November 16, 2009 by iMFdirect
By Carlo Cottarelli
One obvious fallout of the global financial crisis is a huge deterioration in fiscal conditions, particularly in advanced countries. The numbers are nothing short of staggering. Gross general government debt in the G-20 advanced economies is projected to approach 120 percent of GDP by 2014, up from about 80 percent in 2007, and this is even assuming no renewal of fiscal stimulus beyond 2010.
Some might think that this comes from an “exotic” form of fiscal policy whereby governments opened their coffers to prop up financial institutions. But only a small part of this debt spike is matched by a rise in financial assets. It really boils down to “plain vanilla” deficits—revenue losses from the recession, fiscal stimulus, and some underlying spending increases that would have occurred even without a recession.
Filed under: Economic Crisis, Financial Crisis, Fiscal Stimulus, IMF | Tagged: debt overhang, debt ratios, fiscal exit strategies, fiscal space, Fiscal Stimulus, government spending, health spending, pensions, population aging | 2 Comments »
Posted on November 12, 2009 by iMFdirect
Update: IMF Managing Director Dominique Strauss-Kahn delivered speeches in both Singapore and Beijing. In Singapore he spoke of a leadership role for Asia, while in Beijing he addressed how China is leading the world out of recession and the need for further reform of China’s dynamic economy.
By Anoop Singh
(Version in 日本語)
Asia’s standing and influence continues to grow and the IMF is working with the region to help it meet its full economic potential as it recovers from the global crisis. In mid-November, the Managing Director of the IMF, Dominique Strauss-Kahn, begins a six-day trip to Asia. First he’s in Singapore attending the 16th Asia-Pacific Economic Cooperation (APEC) Finance Ministers’ Meeting, and then goes on to China November 16-17, one of the region’s most dynamic economies.
In Singapore, the Managing Director co-chairs a roundtable discussion on economic policy challenges facing the region and will deliver a lecture on the role of Asia in reshaping the post-crisis global economy. In China, he will discuss with the authorities their policy response to the global crisis and ask senior government officials about their outlook for the Chinese and world economies.
The visit is another sign of the importance which the IMF attaches to its relationship with Asia as the region leads the world away from crisis toward global recovery. It will also provide Asia and the IMF an opportunity to deepen their engagement.
Filed under: Asia, Economic Crisis, IMF, International Monetary Fund, Multilateral Cooperation, recession | Tagged: APEC, China, gold, Heng Swee Keat, India, Mongolia, Reserve Bank of India, Singapore, Strauss-Kahn, Tharman Shanmugaratnam | Leave a Comment »
Posted on November 8, 2009 by iMFdirect
By Anoop Singh
As Asia starts down the path to recovery, it is going to have to tackle two issues which are constraining its long-term growth potential: firms that save but do not invest and wealthy households that are reluctant to consume.
At first glance, such behavior seems inexplicable and counter-intuitive. Let’s imagine for a moment you are an investor—you may well be— you put quite a bit of money into a company to back its expansion plans. Initially, these plans prove successful, and the company makes quite a bit of money. But then the firm ran out of investment ideas. What would you expect them to do?
Surely, you would expect them to return the money you provided, for example by paying it out as dividends. But in the past, prosperous decade before the current downturn this hasn’t been happening in emerging Asia. Firms have been sitting on their profits, not investing them, but not paying them out in dividends, either. That is a puzzle, and a problem.
Filed under: Asia, Economic research, Emerging Markets, growth, recession | Tagged: Asian crisis, Asian firms, China, consumption, household saving | 9 Comments »
Posted on November 4, 2009 by iMFdirect
By Anoop Singh
It was Aristotle who said “one swallow does not a summer make, nor one fine day.” Perhaps if Aristotle had been an IMF economist living in current times, he might have said “a few green shoots do not a recovery make.” Despite budding green shoots in Asia, policymakers in the region will need to be cautious about how they sustain this fragile recovery. In the coming year, they will need to pull off a difficult balancing act.
On the one hand, they need to continue providing extensive macroeconomic support to their economies until it is clear that the recoveries are sufficiently robust and sustainable. On the other hand, they have to make sure that stimulus is not maintained for so long that it ignites asset price bubbles, inflation pressures, or concerns about fiscal sustainability.
Where policymakers strike this balance will depend on a prior assessment: they will need to decide whether private demand has become strong enough to substitute for a withdrawal of public sector demand.
And if that isn’t difficult enough, this assessment will need to be forward-looking, at a time when the economic outlook has become exceptionally uncertain.
In figuring out how to pull off this delicate balancing act, the lessons of the past may prove instructive. So, Chapter II of the latest Regional Economic Outlook for Asia and the Pacific, launched last week in Seoul and Tokyo, looks at the experience of Japan, when it emerged from its 1990s banking crisis.
Filed under: Asia, Economic Crisis, growth, IMF, recession | Tagged: Banking crisis, China, India, Japan, recovery | 1 Comment »
Posted on November 2, 2009 by iMFdirect
By Anoop Singh
Now here’s the puzzle: how is it that Asia has rebounded sooner and more strongly than the rest of the globe from the economic slump when the region is so heavily dependent on exports for its growth? This, and the future prospects for the region, are two of the key issues we analyzed in the latest Regional Economic Outlook (REO) for Asia and the Pacific, recently launched in Seoul and Tokyo.
There are three pieces to the puzzle of Asia’s rebound:
- Exports (in value added terms) account on average for about one-third of GDP in emerging Asian countries, while many of the region’s large firms depend on global capital markets to finance their investment projects.
- Recovery in the rest of the world has been unsteady.
- Yet Asia’s own GDP figures for the third quarter have been impressive: Korea grew nearly 3 percent in that quarter alone, Singapore grew even faster, and China’s growth accelerated to 9 percent year-on-year, propelled by booming investment.
Filed under: Asia, Economic Crisis, Fiscal Stimulus, growth | Tagged: China, G-20, Group of Twenty, Korea, recovery, Singapore, trade | 4 Comments »