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