Download macroeconomic policy

MACROECONOMIC
POLICY
Goals
Tools
Types of Economic Policy
Efficiency of Economic Policy
Economic Policy

Definition:

„the set of government rules and Regulations to control or stimulate the
aggregate indicators of an economy“

( http://economictimes.indiatimes.com/definition/macroeconomic-policy )

Areas covered

taxation, government budget, interest rates, labour market, national ownership
and others

Policy is directed to achieve particular goals

target inflation
Example of Czech goals:

unemployment

economic growth
Inflation target: 2% (CNB, 2015)

…
Employment target: 75% for people between 20 – 64
years (government, objective to 2020)
Tools ->
Expenditures on research: 1% of GDP (government,
objective to 2020)

MACROECONOMIC
POLICY
MONETARY
POLICY
Government
spending and
taxation
FISCAL POLICY
Changes in money
supply
Monetary Policy

Monetary policy


is the government or central bank process of managing market
economy. It involves operations with money, interests, loans etc.
Governmental authorities can use direct and indirect instruments:

Direct instruments

Regulation of investment loans (to obtain a loan of extent exceeding
level given by government an applicant has to submit to the bank
approval from state authority)

Regulation of consumption loans (e.g. state-defined maximum
maturity for loans)

Other direct instruments (e.g. loan ceilings)
Monetary Policy

Indirect instruments

Policy of minimum required reserves (central bank sets liability for
commercial banks to store a portion of their assets on a non-interest
account in a central bank)

Free market operations (are the means of implementing monetary
policy by which a central bank controls its national money supply by
buying and selling government securities, or other instruments)

Discount rate policy (discount rate is an interest rate on excess
liquidity stored by commercial banks with the CNB)

ECB Deposit Facility interest rate (= discount rate) … - 0.4% (Effective from
16 March 2016)
CZ discount rate history
1.1.1990
1.4.1990
1.10.1990
11.11.1990
1.1.1991
8. 9.1991
25.3.1992
26.8.1992
30.12.1992
10.6.1993
24.10.1994
26.6.1995
21.6.1996
27.5.1997
14.8.1998
27.10.1998
23.12.1998
12.3.1999
3.9.1999
27.10.1999
23.2.2001
27.7.2001
30.11.2001
22.1.2002
1.2.2002
26.4.2002
4,00
5,00
7,00
8,50
10,00
9,50
9,00
8,00
9,50
8,00
8,50
9,50
10,50
13,00
11,50
10,0
7,50
6,00
5,50
5,00
4,00
4,25
3,75
3,50
3,25
2,75
26.7.2002
1.11.2002
31.1.2003
26.6.2003
1.8.2003
25.6.2004
27.8.2004
28.1.2005
1.4.2005
29.4.2005
31.10.2005
28.7.2006
29.9.2006
1.6.2007
27.7.2007
31.8.2007
30.11.2007
8.2.2008
8.8.2008
7.11.2008
18.12.2008
6.2.2009
11.5.2009
7.8.2009
1.10.2012
2.11.2012
2,00
1,75
1,50
1,25
1,00
1,25
1,50
1,25
1,00
0,75
1,00
1,25
1,50
1,75
2,00
2,25
2,50
2,75
2,50
1,75
1,25
0,75
0,50
0,25
0,10
0,05
Types of Monetary Policy

Monetary policy performed by central bank can be

Expansive policy
 when money supply is raised by reduction of discount rate,
purchase of securities etc.

Cutback policy
 when money supply is reduced (augmentation of discount rate)
Fiscal Policy

Fiscal policy

actions of a government
 setting the level of public expenditure
 how that expenditure is funded

influences government budget
 Income side
 Expenditure side
Fiscal Policy

Income side (Revenues):


is formed mainly by taxes. Tax is a financial charge or other levy imposed on an
individual or a legal entity by a state. Tax system usually consists of:
 Direct taxes are ones paid directly to the government by the persons (legal
or natural) on whom it is imposed: in CZ income tax, road tax, real estate
tax, real estate transfer tax
 Indirect taxes are ones which are collected by intermediaries who turn over
the proceeds to the government and file the related tax return: in CZ value
added tax (VAT), consumer tax (alcohol etc.), ecological tax
 Other revenues are various customs and administrative fees
Expenditure side (Expenses):


Purchases of goods and services (for national defense, government
administration, education system etc.)
Transfer payments (are payments of money from a government to an
individual for which no good or service is required in return; e.g.
unemployment benefit)
Types of Fiscal Policy

Expansionary fiscal policy - an increase in government purchases of goods
and services, a decrease in net taxes, or some combination of the two for
the purpose of increasing aggregate demand and expanding real output.

Contractionary fiscal policy - a decrease in government purchases of goods
and services, an increase in net taxes, or some combination of the two for
the purpose of decreasing aggregate demand and thus controlling inflation.

Neutral fiscal policy - Modest fiscal policy. Generally not a common stance
to take as there is no intention of affecting economic activity - this is rare,
especially in contemporary times.
If revenues > expenses → surplus of national budget
 If revenues < expenses → deficit of national budget

External Commerce and Monetary
Policy

External commerce and monetary policy



regulates flows of goods, services and capital that
cross the country borders
each movement of goods, services and capital is
reflected in country’s balance of payments.
A long-term equilibrium of balance of payments is
one of conditions that qualifies fulfilment of final goals
of stabilization policy.

The change of exchange rate can influence the
balance of payments.
Employment and Income Policy

Source: Národní program reforem České
republiky 2012
Types of Economic Policy

Keynes’s theory
 Keynesians require fast response of government to economy
development and active correcting of economy failures
 fiscal policy

Neoclassical theory
 is based on the stimulation of aggregate supply
 main condition of market mechanism operation is price stability
 monetary policy

Neokeynes’s theory
 Neokeynes’s theory is developed from Keynes’s theory. Neokeynesians
want to realize their economic policy as a suitable combination of
monetary and fiscal policy.
Efficiency of Economic Policy

Generally, there are four basic goals of economic policy:




1. Sufficient rate of unemployment
2. Stability of price level
3. Sufficient rate of real output growth
4. Long-term equilibrium of balance of payments

These goals are conflicting. Fulfillment of one goal (unemployment
reduction) is in conflict with other goal (price level stability).

Efficiency of economic policy can be measured e.g. by:

Magic tetragon
 Philips curve
Magic Tetragon

This controversy of mentioned four goals is
described with “magic tetragon”. To represent
graphically the efficiency of economic policy so
called diamonds are used.

The shape of diamond expresses efficiency of
governmental policy on individual fields; as more
far away is vertex from an intersection point of x
and y, than the government was more successful
in carrying the relevant goal.

The size of diamond’s area indicates total
efficiency of stabilization policy. The grater the
area is, the more successful the policy was.
Magic Tetragon

G - average yearly rate of real
production growth

U - average yearly rate of
unemployment

I (P) - average yearly
inflation rate

B - average portion of
balance of payments on
current account as a part of
national output in %
Philips Curve

This analysis is related to the name of economist A.W.Philips, author of
Philips curve.

The Phillips curve is a historical inverse relation and tradeoff between the
rate of unemployment and the rate of inflation in an economy. Stated
simply, the lower the unemployment in an economy, the higher the rate of
change in wages paid to labor in that economy.

Drop of unemployment results in price level augmentation; lowering inflation
leads to higher unemployment. The government has to decide between
keeping high employment and the cost of high inflation or having stable
prices but high unemployment.

Government can influence the rate of unemployment and rate of inflation.
These can be done e.g. by convincing employers and unions to reduce
growth rate of prices and wages.
Philips Curve
Records related to CZ

Inflation
 12/2007
… 5,4%
 12/2014 … 0,1%

Unemployment
 12/2007
… 6,0%
 12/2014 … 7,5%
Resume

Economic policy – goals & tools
Monetary – money, interests, loans
 Fiscal – budget
 External Commerce and Monetary Policy – int. trade
 Income and Employment policies – wages, labour market


Efficiency

Magic tetragon
 Philip’s curve