inter-american development bank april 23, 2009 the opinions expressed in these comments are the...
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Inter-American Development BankApril 23, 2009
The opinions expressed in these comments are the responsibility of the author and do not necessarily represent the view of the IMF or its Board
of Directors
DiscussionAntonio Spilimbergo
(IMF and CEPR)
2
OutlineOutline ContextContext Sources of the shocksSources of the shocks Policy responsesPolicy responses Design of fiscal policyDesign of fiscal policy
3
Global Growth Global Growth
-2
0
2
4
6
8
10
Emerging
Real GDP
Advanced
1970 80 90 2000 1075 85 95 05
Global Growth(Percent change from a year ago)
World
4
Advanced Countries
Causes of the collapse of output: Continued financial crisis.
Direct effect of credit crunch
Trade
Investment
Indirect effects
Lower wealth
Collapsing confidence
Wait and see
5Industrial Activity and Global Trade Have Fallen Very Sharply
Merchandise Exports(Annualized percent change of 3mma over previous 3mma)
-20
-15
-10
-5
0
5
10
15
Jan-00 Jan-02 Jan-04 Jan-06 Jan-0830
35
40
45
50
55
60
65
Industrial Production(Annualized percent change of 3mma over previous 3mma)
Global IP
Global Manf. PMI(sa, RHS)
-40
-30
-20
-10
0
10
20
30
40
50
60
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Dec.08
World
Nov.08
Advanced
Emerging
6
40
50
60
70
80
90
100
110
120
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
U.S.
J apan
Euro area
U.K.
Fall in Stock Markets and Consumer Confidence
1/23 0
20
40
60
80
100
120
140
160
180
Jan-05 Jan-06 Jan-07 Jan-08
U.S.
Japan
Euro area
U.K.Dec.08
Equities(1/1/2007=100; FTSE)
Consumer Confidence(Jan. 2005=100)
LehmanBrothers
7
Emerging Economies – Latin America
Three Major Shocks:
Drop in External Demand;
Tighter Credit (External Financing); and
Lower Commodity Prices.
8
-40
-20
0
20
40
60
03 04 05 06 07 08 09
-10
-5
0
5
10
15
20
03 04 05 06 07 08 09
Emerging Economies Growth Slowed By Falling Exports and Industrial Production
Industrial Production(in percent change from a year
earlier)
Emg. Asia
Nov.08
Merchandise Exports(in percent change from a year
earlier)
Latin America
Emg. Asia
Latin America
Nov.08
Emg. Europe
Emg. Europe
9
Which Macroeconomic Which Macroeconomic Policies (do not) work? Policies (do not) work?
Export-led is not an option open to Export-led is not an option open to the world as a whole.the world as a whole.
The financial nature of the crisis The financial nature of the crisis weakens the traditional monetary weakens the traditional monetary transmission mechanism. transmission mechanism.
10
Role of Fiscal Policy During Role of Fiscal Policy During the Crisisthe Crisis
Fixing the financial system. Fixing the financial system. Supporting aggregate demand.Supporting aggregate demand. Attenuating the effects on most Attenuating the effects on most
vulnerable sectors.vulnerable sectors.
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Fiscal PolicyFiscal Policy Public Spending on Goods and Public Spending on Goods and
ServicesServices Fiscal Stimulus Aimed at ConsumersFiscal Stimulus Aimed at Consumers Fiscal Stimulus Aimed at FirmsFiscal Stimulus Aimed at Firms
12Public Spending on Goods and Public Spending on Goods and ServicesServices
First, make sure that existing programs First, make sure that existing programs are not cut for lack of resources.are not cut for lack of resources.
Second, spending programs, from repair Second, spending programs, from repair and maintenance, to investment projects and maintenance, to investment projects delayed, can be (re-)started quickly.delayed, can be (re-)started quickly.
Third, a few high profile programs, with Third, a few high profile programs, with good long-run justification and strong good long-run justification and strong externalities, can also help, directly and externalities, can also help, directly and through expectations. through expectations.
13
To avoidTo avoid Public sector wage increases should Public sector wage increases should
be avoidedbe avoided not well targeted; not well targeted; difficult to reverse; and difficult to reverse; and similar to transfers in their similar to transfers in their
effectiveness. effectiveness.
14Fiscal Stimulus Aimed at Fiscal Stimulus Aimed at ConsumersConsumers
Three specific factors affect Three specific factors affect consumption at this juncture: consumption at this juncture: decrease in wealth; decrease in wealth; tighter credit constraints; andtighter credit constraints; and high uncertainty. high uncertainty.
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Fiscal Stimulus Aimed at Fiscal Stimulus Aimed at ConsumersConsumers
Broad based tax cuts?Broad based tax cuts? marginal propensity to consume out of marginal propensity to consume out of
such tax cuts may be quite low. such tax cuts may be quite low. if the termination date is credible, the if the termination date is credible, the
intertemporal incentives implied by intertemporal incentives implied by such a measure are attractive.such a measure are attractive.
the degree of pass-through to the degree of pass-through to consumers is uncertain. consumers is uncertain.
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Fiscal Stimulus Aimed at Fiscal Stimulus Aimed at FirmsFirms
Subsidies or measures to lower the Subsidies or measures to lower the tax-adjusted user cost of capital tax-adjusted user cost of capital (such as reductions in capital gains (such as reductions in capital gains and corporate tax rates) are unlikely and corporate tax rates) are unlikely to have much effect.to have much effect.
Restructuring procedures with Restructuring procedures with government guarantees on new government guarantees on new credit.credit.
17
Sustainability Sustainability ConcernsConcerns
Very importantVery important Not credible policies undermine Not credible policies undermine
the scope of fiscal stimulus.the scope of fiscal stimulus.
18
0
400
800
1200
1600
2000
2400
2800
3200
3600
Jul-07 Nov-07 Mar-08 Jul-08 Nov-08
External Financial PressuresExternal Financial Pressures
Emg. Sovereign CDS Spreads(index: 7/1/2007=100)
Current account surplus or small deficit
Current account deficit larger than 5% of 2007 GDP
1/23
19
0
20
40
60
80
100
120
140
160
180
200
Jun-07 Oct-07 Feb-08 Jun-08 Oct-08
United States
United Kingdom
Japan
Industrial Economies(5yr Sovereign CDS; in basis points)
0
20
40
60
80
100
120
140
160
180
200
Jun-07 Oct-07 Feb-08 Jun-08 Oct-08
France
Germany
Italy
Spain
1/23 1/23
Selected Europe(5yr Sovereign CDS; in basis points)
Rising Concerns Over Fiscal Sustainability
Source: Bloomberg, L.P.
20
Sustainability Sustainability ConcernsConcerns measures that are reversible or that have clear measures that are reversible or that have clear
sunset clauses (e.g., future increases in upper sunset clauses (e.g., future increases in upper income tax rates);income tax rates);
implementing policies that eliminate distortions implementing policies that eliminate distortions (e.g., financial transaction taxes);(e.g., financial transaction taxes);
increasing the scope of automatic stabilizers that, increasing the scope of automatic stabilizers that, by their nature, are countercyclical and temporary;by their nature, are countercyclical and temporary;
providing more robust medium-term fiscal providing more robust medium-term fiscal frameworks;frameworks;
strengthening fiscal governance through strengthening fiscal governance through independent fiscal councils; andindependent fiscal councils; and
improving expenditure procedures to ensure that improving expenditure procedures to ensure that stepped-up public works spending is well directed to stepped-up public works spending is well directed to raise long-term growth (and tax-raising) potential.raise long-term growth (and tax-raising) potential.