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1、L-1 Macroeconomic Stability,Macroeconomic Policies,and Macro-Prudential PoliciesPresenterClinton ShiellsJoint China-IMF Training ProgramCourse on Macroeconomic Management and Financial Sector IssuesCT 14.05OutlineqWhat is macroeconomic stability and why do we care?qPolicies for macroeconomic stabili
2、tyqFiscal policyqMonetary policyqExchange rate policyqThe financial sector and macroeconomic stabilityqMacro-prudential policies2This training material is the property of the International Monetary Fund(IMF)and is intended for use in IMF Institute courses.Any reuse requires the permission of the IMF
3、 Institute.”What is Macroeconomic Stability and Why Do We Care?3MMFWhat do we mean by“macroeconomic stability”?Macroeconomic stability exists when key economic relationships are in balance:Internal balance occurs when real output is at or close to its capacity level and the inflation rate is low and
4、 non-acceleratingExternal balance occurs when the current account position can be sustained by capital flows on terms compatible with the growth prospects of the economy without resort to restrictions on trade and payments4MMFWhy do we care about macro stability?“In practice,the concept of a stable
5、macroeconomic framework is used to mean a macroeconomic policy environment that is conducive to growth.”Fischer(1993)“Conceptually,macroeconomic instability refers to phenomena that decrease the predictability of the domestic macroeconomic environment,and it is of concern because unpredictability ha
6、mpers resource-allocation decisions,investment and growth.”Montiel and Servn(2005)5MMFVolatility and growthSource:Ramey&Ramey(AER,1995)92 countries,1962-85Growth=0.030 0.154 Vol (-2.3)R2=0.057There appears to be a negative relationship between the average and the standard deviation of per capita GDP
7、 growth,both calculated over long periods.6MMFVolatility and growthSource:Hnatkovska and Loayza(2005)79 countries,1960-2000“Normal”volatility vs.“crisis”volatility?7MMFCrisis volatilitySource:WEO(Ch.IV,Oct.2009)8MMF(Log scale)Output costs of crisesLevel of outputLevel of outputSource:Cerra and Saxen
8、a(2008)9MMFOutput costs of crisesSource:WEO(Ch.IV,Oct.2009)On average,output falls steadily below its pre-crisis trend until the third year after the crisis and does not rebound thereafter.First year of crisis at t=0 Mean difference from year t=-11 The interquartile range indicates the middle 50%of
9、all crises88 banking crises from early 1970s to 2002222 currency crises from early 1970s to 2002Output evolution after banking crises(Percent of pre-crisis trend)Output evolution after currency crises(Percent of pre-crisis trend)YearYear10MMFGDP growthSource:WEO(October 2013)11MMF1980198119821983198
10、419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016201720180246810-2-4-6Real GDP growthAnnual percent changeAdvanced economiesEmerging market and developing economiesOutput growth volatilitySource:WEO(Ch.V,Oct.2007)Before
11、the global financial crisis,output growth volatility had been steadily declining from its peak during the 1970s.12MMFOutput growth volatilitySource:WEO(Ch.V,Oct.2007)(Rolling 10-year standard deviations of detrended growth)13MMFVolatility patternsSource:WEO(Ch.V,Oct.2007)Growth takeoff begins in tim
12、e t=0 on the x-axis.(1950 for Brazil,Japan,Mexico,W.Germany;1963 for Korea;1979 for China;1984 for India)14MMFPolicies for Macroeconomic Stability15MMFWhat causes macroeconomic instability?Exogenous shocksE.g.,terms of trade shocks,natural disasters,financial contagion,etc.Inappropriate policiesE.g.
13、,excessively loose fiscal policy16MMFWhat should policymakers do?Remove destabilizing policies that are themselves sources of shocksE.g.,tighten excessively loose fiscal policyDepends on the institutional settingUse policies as stabilizing instruments in response to exogenous shocksE.g.,countercycli
14、cal fiscal policyDepends on how vulnerable the economy is to shocks17MMFPolicies for macroeconomic stabilityFiscal policyMonetary policyExchange rate policyFinancial sector policies18MMFFiscal policyIf fiscal policy is the cause of macroeconomic instability,strengthening the fiscal balance will prom
15、ote internal balance and external balanceCAB=S I=(Sg Ig)+(Sp Ip)Key measures:Expenditure restraint,expenditure reallocationRevenue-raising initiatives(tax and non-tax)Fiscal reform must be permanent in order to be credible19MMFPublic sector solvency conditionThe present value(PV)of primary surpluses
16、(T-G)and seigniorage revenue(dM)should be at least as large as the governments outstanding stock of net debt(B):PV T-G+dM =BStability requires that the authorities choose a monetary and fiscal policy stance that is consistent with maintaining public sector solvency at low levels of inflation,while l
17、eaving some scope for mitigating the impact of real and financial shocks on macroeconomic performance20MMFFiscal policy over the cycleOld view:Limited role for fiscal policy relative to monetary policyFocus on debt sustainability and fiscal rules to achieve thisNew view:Countercyclical fiscal policy
18、 is an important toolCreate more fiscal space in good times:lower target debt levelsDesign better automatic fiscal stabilizers:rules that allow some transfers or taxes to vary based on pre-specified triggers tied to the state of the economic cycle21MMFFiscal balancesSource:WEO(Ch.I,Oct.2009)General
19、government fiscal balances(Percent of GDP)22MMFFiscal volatility(Unweighted averages)4 Defined as the rolling 10-year standard deviation of cyclically adjusted government consumption as a percent of GDPSource:WEO(Ch.V,Oct.2007)23MMFFiscal volatility:East AsiaSource:Olaberria and Rigolini(PRWP 4989,2
20、009)East Asia displays a high correlation between the volatility of fiscal policy and output growth volatility(0.89)Volatility of government spending is measured as the weighted average standard deviation of detrended government consumption growth using a 10-year window.Output volatility is measured
21、 as the standard deviation of per capita GDP growth using a 10-year window.24MMFProcyclical fiscal policy:Developing countriesSource:Ilzatzki and Vegh(NBER WP 14191,2008)A 10%shock to GDP leads to an increase of around 3%in government consumption after 2 quarters.27 developing countries,1960-2006Res
22、ponse of real government consumption to GDP shock25MMFPublic debtSource:WEO(October 2013)26MMF2000200120022003200420052006200720082009201020112012201320142015201620172018020406080100120General Government DebtPercent of GDPAdvanced economiesEmerging market and developing economiesMonetary policyFisca
23、l dominance“The roots of inflation are ultimately fiscal.”Strengthening central bank independence may be important for credibilityRules versus discretionEffectiveness of monetary policy for macroeconomic stabilization depends on the exchange rate regime and the degree of international financial inte
24、gration27MMFInflationSource:WEO(October 2013)28MMF2000200120022003200420052006200720082009201020112012201320142015201620172018012345678910Consumer price inflationAnnual percent changeAdvanced economiesEmerging market and developing economiesThe Great ModerationSource:Bean(2009)29MMFMonetary policy c
25、redibilitySource:WEO(Ch.III,Apr.2006)Minimum=0;Maximum=130MMFCentral bank autonomySource:WEO(Ch.III,Oct.2008)This index captures the ability of a central bank to pursue independent monetary policy31MMFMonetary policy index(Unweighted averages)Source:WEO(Ch.V,Oct.2007)This index measures the success
26、of the monetary framework in maintaining low inflation3/Defined as exp 0.005*(inflation 2%)232MMFCredit expansionFinancial liabilities of household and business(Percent of GDP)If monetary policy was so advanced in the advanced economies,why was there a credit boom in the run-up to the crisis?Source:
27、Bean(2009)33MMFDeviation of policy rates from Taylor ruleSource:Bean(2009)Was monetary policy too expansionary?34MMFMonetary policy and housing boomsSource:WEO(Ch.III,Oct.2009)Euro area economies are designated by blue squares.Other advanced economies are designated by red squares.Blue lines are fit
28、ted to a subsample of euro area economies.Black lines are fitted to the whole sample of advanced economies.Did expansionary monetary policy lead to asset price booms?35MMFExchange rate policyGoals of exchange rate policy:Promote competitiveness and a sustainable current account positionServe as a cr
29、edible nominal anchor(in the case of a peg)What is the appropriate level of the real exchange rate?One that ensures a sustainable current account balanceWhen is an exchange rate adjustment needed?Possible signals:Noticeable parallel market in foreign exchangeLarge and persistent current account defi
30、citsLarge and sustained appreciation in the real effective exchange rate36MMFCurrency crashesSource:Reinhart and Rogoff(2009)Share of countries with annual depreciation greater than 15%,1800-2006Median Annual Depreciation,All countries,5-year moving average,1800-200637MMFLimitations of macroeconomic
31、 stabilizationMacroeconomic stabilization can achieve low inflation and external sustainability.But stabilization alone is often not enough to achieve rapid growth and higher real incomes.Structural reform must usually accompany stabilization to achieve higher incomes.Structural reform may also be n
32、eeded for the credibility of an adjustment program.38MMFExamples of structural reformsFinancial sector policiesFinancial sector development and regulationExternal sector reformsTrade liberalization,capital account liberalization Price adjustment and liberalizationWage policy,administered prices,etc.
33、Policies to promote competition Tax,expenditure,and budgetary reformsState enterprise reform,privatization,restructuring39MMFThe Financial Sector and Macroeconomic Stability40MMFFinancial sector policyAn efficient domestic financial system is important for growthA sound domestic financial system is
34、important for macroeconomic stabilityA sound domestic financial system requires regulation and oversightFinancial liberalization should be a means to achieving an efficient financial system,not an end in itself41MMFFinancial systemAn efficient financial system allocates capital to the most productiv
35、e uses and continually monitors the use of funds Key services provided by the financial systemLenders/SaversBorrowers/SpendersConveys informationIncreases liquidityReduces risk42MMFFinancial development and growthFinancial developmentHigher income per capitaHigher net worth lower monitoring costs,th
36、icker securities marketsMore public goods that facilitate financial intermediationHigher investmentHigher productivityMore incentive to save43MMFFinancial development and growthDependent variableDEPTH(1960)R2Real per capita GDP growth,1960-892.8*(0.001)0.61Real per capita capital growth,1960-891.9*(
37、0.001)0.63Productivity growth,1960-892.2*(0.001)0.58Source:Levine(1997)44MMFFinancial sector and macroeconomic stabilityBanking crises and financial market crises can directly cause macroeconomic instabilityFinancial market conditions can amplify real shocks and the business cycleFinancial accelerat
38、orFinancial sector weakness can decrease the effectiveness of macro policy tools during a crisisDisrupt transmission links between monetary policy and operating targetsWeaken supply response to exchange rate changes45MMFSystemic banking crises and recessions Source:Reinhart and Rogoff(2008)Spain,197
39、7Japan,1992Norway,1987Philippines,1997Sweden,1991Hong Kong,1997Colombia,1998Korea,1997Historical AverageMalaysia,1997Finland,1991Thailand,1997Indonesia,1997Argentina,2001U.S.,19291.9 years-9.3%Duration of downturn(in years)Percent decline in real GDPPast Real Per Capita GDP Cycles and Banking Crises
40、:Peak-to-trough46MMFCredit crunches,asset price busts,and recessionsRecessions associated with credit crunches and asset price busts are longer and are associated with greater output losses than recessions without such financial stresses.Source:Claessens,Kose,and Terrones(2008)47MMFFinancial acceler
41、ator The effects of a real shock on financial conditions can lead to persistent fluctuations in the economy.External finance(raising funds from lenders)is more expensive than internal finance(using internally generated cash flows).The external finance premium that a borrower must pay depends inverse
42、ly on the strength of the borrowers financial position(net worth).Positive shocks increase net worth,reduce the cost of credit,and induce more investment and consumption;negative shocks reduce net worth,increase the cost of credit,and induce less investment and consumption.Hence shocks are amplified
43、 and become more persistent.48MMFBank-lending channelShocks affecting the net worth and liquidity of banks,and thus their creditworthiness,in turn affect the external finance premium that banks face and will be reflected in the cost and availability of funds to bank-dependent borrowers.49MMFFinancia
44、l regulationOld view:Financial regulation is outside the macro policy framework;its objective is to keep individual institutions and markets behaving prudently.Micro-prudential regulationNew view:Financial regulation is not macroeconomically neutral;it can be used as a cyclical policy tool.Macro-pru
45、dential regulationNeed for a policy approach that falls between macroeconomic management and traditional prudential regulation of financial institutions50MMFMacro stability and risk perceptions“A tendency of people to underestimate future risks during periods of good economic performance seems to be
46、 a recurring theme in the history of financial markets.“(Bean,2009)Implied volatilities from options(standardized to zero mean and unit variance)Chicago Board Options Exchange Volatility Index(VIX)measures implied volatility of S&P 500 index options Merrill Lynch Option Volatility Estimate Index(MOV
47、E)measures implied volatility on 1-month Treasury optionsSource:Bean(2009)51MMFFeedback on the way upIn the up-phase of the economic cycle:Price-based measures of asset values rise,price-based measures of risk fall,and competition to grow bank profits increases.Market discipline encourages financial
48、 institutions to respond by increasing leverage(using short-term“wholesale”funding).Increasebalance sheet sizeStrongerbalance sheetsIncrease leverageAsset price boom52MMFFeedback on the way downIn the down-phase of the economic cycle:Probability of default on assets rises balance sheets weaken.Banks
49、 sell assets to satisfy liquidity runs by investors or to re-establish capital ratios(“fire sale”).Sale of assets by one institution decreases the value of all similar assets held by other institutions(mark-to-market valuation)downward price spiral.Reducebalance sheet sizeWeakerbalance sheetsDecreas
50、e leverageAsset price bust53MMFCountercyclical regulation?Overall goal:To maintain a stable provision of financial services to the wider economypayments services,credit supply,and insurance against riskSpecifically:To reduce the size,frequency,and damage created by asset price bubbles linked to exce