Almaty 2011

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Economic Policy Consistency and the Growth of Nations Finn E. Kydland University of California Santa Barbara Almaty, May 5-6, 2011

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Презентация лекции Лауреата нобелевской премии Финна Кидланда в КазГУ

Transcript of Almaty 2011

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Economic Policy Consistency and the Growth of Nations

Finn E. Kydland University of California

Santa Barbara

Almaty, May 5-6, 2011

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Real GDP per capita Real GDP per capita

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Real GDP per capita Real GDP per capita

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Real GDP per capita Real GDP per capita

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• All interesting macroeconomic phenomena are forward-looking (dynamic)

Aggregate production function

GDPt = ZtF(Kt,Lt)

Technology for converting inputs of capitaland labour into output of goods and services

Technological progress

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• Recent examples of U.S. government “policy” (theme: significant stimulus for the economy?)

Fiscal policy: Stimulus through temporary tax rebates – little effect on consumer spending (and investment)

Stimulus spending? Investment in infrastructure, if it improves future productivity significantly, can justify the additional debt to pay for it. Otherwise, may be a bad idea, especially for a nation with budget problems.

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• Monetary policy

Monetary changes ordinarily not potentto stimulate the economy

What about the big U.S. central-bank injection of liquidity in 2008? Needed in order to counteract major decline in money multiplier

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• Money multiplier

Quantity of money = Money multiplier x Monetary base

Money multiplier affected negatively by rise in reserve/deposit ratio and in currency/deposit ratio

Injection of liquidity (base money) not inflationary unless it more than makes up for drop in multiplier.But what about the next few years?

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• Perspective from a bit of theory of benign government:

Suppose the government has an unchanging objective, say, to maximize some measure of the present value of citizens’ welfare over time

Theoretical result: The resulting optimal government policy generally is inconsistent over time; it requires a commitment mechanism in order to be implemented. Otherwise, there’s a strong temptation to change policy in the future.

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• Where is that temptation theoretically the greatest?

Increase tax on physical and human capital(especially relevant in the current situationwith large and growing debt/GDP ratios)

Partially renege (default) on government debt, say, through surprise inflation

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Examples of mechanisms used in practice by governments to tie their own hands (not always successfully!)

(i) Gold Standard

(ii) Currency Board

(iii) Independent Central Banks

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• Main driving forces for economic growth:

Innovation and technological progress(Z in the production function).

Future productivity growth is key.

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• But, to take advantage of technological change:

Need incentives to invest in new capital, physical (structures and equipment) and human Government policy may be a crucial factor, positive or negative, for growth

Examples: Argentina in 1990s and early 2000s (negative)Ireland in 1990s and much of 2000s (positive)

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ARGENTINAGDP per working age person (Index)

0.8

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1998

Lost Decade Depression

1990s boom

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• Argentina experienced Lost Decade in the 1980s. But especially interesting: The 1990s boom

Economy grew at quite high rates in the 1990sSurprise: In light of the observed rate of productivity growth, a standard macro model implies that investment should have been much larger in the 1990s, and the capital stock therefore much greater by the end of the decade

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ARGENTINAGDP

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-0.3

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ARGENTINAGDP

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ARGENTINACapital Input

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ARGENTINACapital Input

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• Probable main explanation

Time-inconsistency “disease” due topast hyperinflations, devaluations,deposit freezes and defaults ongovernment obligations, resulting inlack of credibility among investors

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ARGENTINACapital input per working age person

LOWER CAPITAL: LOWER REAL WAGES, WORSE DISTRIBUTION OF INCOME

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• Contrast with Ireland

Strong growth since 1990

But first: Schooling had expanded since 1960s

Then, around 1990:Introduced tax policy geared for the long-run

Lower tax rates, with commitmentfor the next 20 years

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• Examples of productivity-enhancing policies vs lack thereof

Chile and Mexico after 1981

Finland and Japan after 1990

Korea 1997-98

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• Summary of lessons for policy

Focus on incentives for productivitygrowth (innovation) and capitalaccumulation

Government policy has to be credible and forward-looking

Ideally, need institutions geared to avoiding “time-inconsistency disease”

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• Income and wealth disparities across nations

Low income often the result of country-specific policies that directly or indirectly restrict the setof technologies and work practices that can be used

Bad: protection of vested interests

A lot of knowledge available. May need to be combined with nation-specific innovative activity

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• Importance of good economic policy

Paraphrasing the conclusion of Parente & Prescott’sbook on Barriers to Riches:

With good policy, there is potential in poor nationsfor, not 1-2 percent, but 1000-2000 percent income increase

Ex.: Korea’s growth miracle, from 1965 to 1990for example, represented a 6-fold increase in per capita output

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• Main Conclusions

Designing policy for the Longer Run much more important than short run

Enough uncertainty in the world as is;extra government uncertainty is bad

Opportunity for nations with credibility to narrow gap to the high-income-per-capita countries

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