Download Rethinking Public Debt and Fiscal Policy

Rethinking Public Debt and
Fiscal Policy
Guillermo Calvo
Columbia University
www.columbia.edu/~gc2286
Credit Market Rupture
2
Normal Times
SAVERS
Private Sector
DISSAVERS
3
Credit Sudden Stop
SAVERS
Private Sector
DISSAVERS
•The central problem is financial, and
policy should focus on financial issues !!
4
Credit market Sudden Stop brings about
excess supply of goods and services.
“Lack of demand” is not a consequence of
Sudden Anorexia or Sudden Loss of SelfEsteem!
– However, these symptoms could develop
afterwards as a result of drastic change in
demand structure.
Global Issues
First priority is to normalize financial
system.
If the government can borrow at low
interest rates, it makes sense to stabilize
aggregate demand to prevent
– Irving Fisher Debt Deflation
– Excess relative price volatility.
In addition, social programs to protect
unemployed and the poor.
However, high government expenditure
crowds out private sector and may
slowdown discovery of new equilibrium
output pattern.
This shows relevance of exit strategies.
Fiscal deficit and large public debt are
important issues but less critical than the
previous ones in the short run.
The Current Situation in the US
It is much more serious than Sudden
Stops in Emerging Market economies
(EMs).
Sudden Stops were followed by a sharp
increase in exports,
while in the US exports have declined.
8
Exports
(Goods and Services, quarterly data, seasonally adjusted)
102
120
101
115
100
110
99
GDP
97
100
96
95
95
AEM - GDP
AEM - Exports
US - GDP
US - Exports
94
93
92
90
85
80
2008-I
t-1
2008-II 2008-III 2008-IV 2009-I
t
t+1
t+2
Source: Calvo and Loo-Kung (2010).
t+3
2009-II 2009-III 2009-IV 2010-I
t+4
t+5
t+6
t+7
2010-II 2010-III 2010-IV 2011-I
t+8
t+9
t+10
t+11
Exports
105
98
Moreover, EM recovery was accompanied
by a sharp fall in real wages and real
currency devaluation.
In contrast, US real wages are flat or
increased, and the dollar has appreciated
in real terms.
10
Real Exchange Rate
(Bilateral RER vis-a-vis the US for AEM, Multilateral Effective RER
for US, quarterly data, seasonally adjusted)
102
140
101
135
100
130
125
98
GDP
120
97
115
96
110
95
AEM - GDP
AEM - RER
US - GDP
US - RER
94
93
92
105
100
95
2008-I
t-1
2008-II 2008-III 2008-IV 2009-I
t
t+1
t+2
Source: Calvo and Loo-Kung (2010).
t+3
2009-II 2009-III 2009-IV 2010-I
t+4
t+5
t+6
t+7
2010-II 2010-III 2010-IV 2011-I
t+8
t+9
t+10
t+11
Real Exchange Rate
99
Real Wages
(Wages deflated by CPI)
Average EM
US
102
105
101
100
100
95
99
104
101
103
100
102
99
101
98
90
98
97
100
96
85
97
99
95
80
96
75
95
98
94
93
t (Peak)
t+1
t+2
years
quarters
GDP Real Wages (right axis)
Source: Calvo and Loo-Kung (2010).
97
t+3
As in EMs, bank credit in the US has dried
up.
Especially to small enterprises and
households.
Real Credit
(Claims on Private Sector over CPI, quarterly data)
101
100
GDP
105
AEM - GDP
AEM - Credit
US - GDP
US - Credit
103
101
99
99
98
97
97
95
96
93
95
91
94
89
93
87
92
85
2008-I 2008-II 2008-III 2008-IV 2009-I 2009-II 2009-III 2009-IV 2010-I 2010-II 2010-III 2010-IV 2011-I
t-1
t
t+1
t+2
Source: Calvo and Loo-Kung (2010).
t+3
t+4
t+5
t+6
t+7
t+8
t+9
t+10
t+11
Real Credit
102
However, US Output is Recovering
at a Rate Similar to EMs’ !!
15
Real GDP: AEM collapse vs. US subprime Crisis
(quarterly data, seasonally adjusted)
Peak
Trough
104
Average EM GDP
US GDP (data)
US GDP (Consensus Forecast)
102
100
98
96
94
92
2008-I
2008-II
t-1
t
2008-III 2008-IV
t+1
t+2
2009-I
2009-II
t+3
t+4
Source: Calvo and Loo-Kung (2010), www.voxeu.org.
2009-III 2009-IV
t+5
t+6
2010-I
2010-II
t+7
t+8
2010-III 2010-IV
t+9
t+10
2011-I
t+11
The US aggregate-demand drivers of output
recovery are:
Government Consumption
Investment
Government Consumption
102
105
101
104
100
103
99
102
98
101
97
100
96
99
95
98
AEM - GDP
AEM – Gov. Cons.
US - GDP
US - Gov. Cons.
94
93
92
97
96
95
2008-I
t-1
2008-II 2008-III 2008-IV 2009-I
t
t+1
t+2
Source: Calvo and Loo-Kung (2010).
t+3
2009-II 2009-III 2009-IV 2010-I
t+4
t+5
t+6
t+7
2010-II 2010-III 2010-IV 2011-I
t+8
t+9
t+10
t+11
Government Final Consumption
GDP
(Gov. Final Consumption, quarterly data, seasonally adjusted)
US Economic Predicaments
Recovery is based on domestic aggregate
demand,
which does not help to resolve Global
Imbalances.
Fiscal stimulus is about to be phased out,
and exports are weak, slowing growth.
Domestic investment is likely to involve
less labor-intensive activities, making
employment-less recovery likely
– which complicates politics and increases the
probability of protectionism.
US Macro Policy Dilemmas
Doing nothing risks triggering price deflation.
This is dangerous because it is a selfreinforcing mechanism.
I would favor relaxing financial constraints for
small firms (the Fed reports that banks are
voluntarily starting to do that).
Government expenditure exacerbates Global
Imbalance and slows down discovery.
– But it could be the solution of last resort if
monetary/credit policy fails.
Emerging Market economies
Fiscal policy is less feasible because
Flight to Quality is less likely to include EM
public bonds.
However, EM public bonds could be
enhanced by World Bank programs.
Infrastructure projects are attractive in
many instances, and could be financed
through PPP (Public-Private Partnership).
EM government expenditure helps to
resolve Global Imbalance.
Inflation, not deflation, is a possible
problem.
Therefore, Inflation Targeting is still a valid
objective.
However, credit policy should not be
ignored, especially during Sudden Stop.
International Reserves could be used to
extend foreign exchange credit to critical
sectors, like the export sector (as in Brazil
2002 and 2008/9).
Rethinking Public Debt and
Fiscal Policy
Guillermo Calvo
Columbia University
www.columbia.edu/~gc2286