Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Washington Consensus wikipedia , lookup
Balance of payments wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Pensions crisis wikipedia , lookup
Business cycle wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Interest rate wikipedia , lookup
Global financial system wikipedia , lookup
Exchange rate wikipedia , lookup
International monetary systems wikipedia , lookup
Post–World War II economic expansion wikipedia , lookup
Macroeconomic Stability and Economic Resilience: The Role of Macroeconomic Policies Lawrence Schembri Bank of Canada Prepared for International Conference on Small States and Economic Resilience Malta, 23–25 April 2007 This presentation represents the views of the author, not the Bank of Canada. Motivation: Why are we here? • • Ultimate economic goal of a nation state is economic growth that is high and stable (and therefore sustainable) → economic growth contributes to a higher quality of life Small states have difficulty achieving this goal – – • they are “economically vulnerable” (Briguglio); they are “open” to adverse external shocks Our objective is to reduce the probability of an adverse impact by “nurturing” “economic resilience” (Briguglio, Cordina et al.) Motivation: Why I am here? Definition “Economic resilience”: – An economy’s ability to recover from, withstand or avoid adverse economic shocks Index of Economic Resilience (4 Components) 1. 2. 3. 4. Macroeconomic stability – MY TASK Microeconomic market efficiency Good governance Social development My purpose: 1. Discuss how macroeconomic stability contributes to resilience and 2. Examine how it can be achieved through macroeconomic policy Measuring Macroeconomic Stability • In the Resilience Index, macroeconomic stability is broadly measured by: 1. Unemployment rate + Inflation rate 2. Fiscal deficit (as a ratio of GDP) 3. External debt (as a ratio of GDP) • • Only #1 is a measure of macro stability #2 and #3 are more accurately described as measures of effective stewardship of public and external resources Key Hypotheses 1. Macroeconomic stability and effective stewardship of public and external resources “nurtures” or contributes to economic resilience 2. Macroeconomic stability and effective stewardship of public and external resources can be enhanced by appropriate domestic macroeconomic (& financial) policies Outline 1. Provide a conceptual framework for these broad measures of macroeconomic stability and their contribution to resilience 2. Discuss how macroeconomic policies (that is, fiscal, monetary and exchange rate policies) contribute to macro stability 3. Analyse the macroeconomic experience of a sample of small states in order to draw useful policy lessons Conceptual Framework “High Level” Macroeconomic & Financial Policies Macro Stability & Effective Stewardship of Public, External & Private Resources Economic Resilience Economic Growth Macroeconomic Stability: “Conceptual Framework” • Ultimate economic goals: “nurturing” economic resilience and achieving high & stable growth • Intermediate goals of public policy: 1. 2. 3. 4. 5. • Internal balance External balance Effective stewardship of public resources Effective stewardship of external resources (Effective stewardship of private resources) Each of these intermediate goals fosters economic resilience and high & stable growth Macroeconomic Stability: Meaning & Contribution to Resilience 1. Internal balance – – Output at the full employment level Low, stable & predictable inflation 2. External balance – – A current account position that is roughly equal to a sustainable level of capital flows Relative domestic prices that adjust smoothly to any imbalance Contribution to Resilience: An economy in internal & external balance can more easily withstand and recover from external shocks. Policies are in place to ensure flexibility & anchor expectations. Effective Stewardship: Public Resources Meaning & Contribution to Resilience 1. Sustainable fiscal deficits & public debt → Debt service costs should be manageable • Tax rates: low, broadly based and stable → Preserve incentives to work, save & invest 2. Expenditures on public goods maximize social returns Contribution to Resilience: Lessen vulnerability to crises with unsustainable debt loads; preserve flexibility to respond to shocks; and maintain internal balance. Effective Stewardship: External Resources Meaning and Contribution to Resilience 1. External debt at sustainable levels → External debt service costs not too onerous 2. Balanced capital inflows → FDI and equity are less prone to reversals → FDI facilitates technology/knowledge transfer 3. Easy access to global markets → Allows borrowing & lending to smooth shocks and portfolio diversification to reduce risk Contribution to Resilience Reduce probability of crises due to high debt loads and unstable foreign borrowing and better diversify risks Effective stewardship: Private resources • Represented by the “microeconomic market efficiency” measures in the Resilience Index • Examples: financial and labour markets • Domestic financial markets should provide efficient intermediation of savings and access to risk diversification • Labour markets should be flexible; wages should adjust or labour move easily in response to shocks Fiscal Policy Contribution to Macroeconomic Stability • Fiscal policy is critical to maintaining macro stability and “nurturing” economic resilience • From a stabilization (internal balance) perspective: → Fiscal policy should be countercyclical → Fiscal policy should be automatic rather than discretionary • To ensure that the public debt/GDP ratio is sustainable (& therefore preserve fiscal space to respond to external shocks), governments should commit to a long-run target for this ratio Exchange Rate & Monetary Policy Contribution to Macroeconomic Stability • Two policies must be discussed together • Choice of exchange rate regime has direct implications for the monetary policy regime 1. Common currency → no domestic monetary policy 2. Fixed or heavily managed exchange rate → monetary policy must maintain the exchange rate 3. Flexible exchange rate → monetary policy independence, but central bank must chose a nominal anchor: inflation or money supply targeting • Key Consideration: Stable nominal target to anchor expectations and maintain macro stability Macroeconomic Policy Challenges in Small States Fiscal Policy • Large demand for expenditures & transfers (governments play a large role; provide insurance) • Tax collection inefficient (lack economies of scale; heavy reliance on import taxes) • Chronic deficits often result that are not easy to finance (require financial institutions to hold debt) • Monetary financing of deficits undermines exchange rate & monetary policy Macroeconomic Policy Challenges in Small States • • • • Exchange Rate & Monetary Policy Difficult to conduct an independent monetary policy (thin domestic financial markets; low demand for monetary base; fiscal problems) Typical policy regimes: Common currencies; currency boards; fixed or heavily managed exchange rate regimes Import domestic monetary policy from abroad Lose the nominal exchange rate as a flexible adjustment mechanism; must rely on flexible wages and prices to absorb shocks Country Populatio n (2006) GDP Billions of USD GDP per capita PPP Exchange rate regime Monetary Policy Framework Bahamas 303,770 $6.48 $21,300 Fixed peg to USD Exchange rate anchor Barbados 279,912 $5.11 $18,200 Fixed peg to USD Exchange rate anchor Fiji 905,949 $5.50 $6,100 Fixed peg against a Exchange rate anchor basket Jamaica 2,758,124 $12.71 400,214 $8.12 Mauritius 1,240,827 Singapore 492,150 Malta $4,600 Float Base money target $20,300 Fixed peg to Euro Exchange rate anchor $16.72 $13,500 Float Inflation targeting $138.6 $30,900 Managed float against a Exchange USD, Euro and JPY. rate anchor Nominal Exchange Rate Local currency per USD 4 70 60 3 50 40 2 30 20 1 10 0 0 1973 Barbados 1978 Malta 1983 1988 Singapore Fiji 1993 1998 The Bahamas 2003 Mauritius Jamaica Misery Index Fixed Exchange Rate 30% 20% 10% 0% 1980 1985 Barbados 1990 Malta 1995 Fiji 2000 Bahamas Misery Index Managed Floating Exchange Rate 100% 75% 50% 25% 0% 1980 1985 1990 1995 Singapore Mauritius Jamaica 2000 Fiscal Deficit per GDP Fixed Exchange Rate 5% 0% -5% -10% 1973 1978 Barbados 1983 Malta 1988 Fiji 1993 1998 The Bahamas 2003 Fiscal Deficit per GDP Managed Floating Exchange Rate 20% 10% 0% -10% -20% 1973 1978 1983 1988 1993 1998 Singapore Mauritius Jamaica 2003 External Debt per GDP 36% 24% 12% 0% 1973 1978 Barbados 1983 Malta 1988 Mauritius 1993 Fiji 1998 2003 The Bahamas Output Growth Fixed Exchange Rate 30% 20% 10% 0% -10% -20% 1973 Barbados 1978 1983 Malta 1988 1993 Fiji 1998 2003 The Bahamas Output Growth Managed Floating Exchange Rate 80% 50% 20% 0% -10% 1973 1978 1983 Singapore 1988 1993 Mauritius 1998 Jamaica 2003 CPI Fixed Exchange Rate 45% 35% 25% 15% 5% 0% -5% 1973 1978 Barbados 1983 Malta 1988 1993 Fiji 1998 2003 The Bahamas CPI Managed Floating Exchange Rate 80% 50% 20% 0% -10% 1973 1978 1983 Singapore 1988 1993 Mauritius 1998 Jamaica 2003 Coefficient of variation for Output Growth 1973 – 2004 1973 – 1989 1990 - 2004 Bahamas 2.80 2.65 1.88 Barbados 2.08 1.73 2.78 Fiji 1.56 2.21 1.05 Jamaica 5.79 -23.54 1.13 Malta 0.83 0.73 0.71 Mauritius 1.30 1.14 0.19 Singapore 0.53 0.44 0.64 Country Coefficient of variation for CPI 1973 – 2005 1973 – 1989 1990 - 2005 Bahamas 0.72 0.47 0.76 Barbados 1.14 0.85 0.95 Fiji 0.64 0.44 0.59 Jamaica 0.76 0.50 0.91 Malta 0.97 1.02 0.32 Mauritius 0.81 0.79 0.37 Singapore 1.58 1.38 0.82 Country Summary of Findings • Prudent fiscal policy seems to be prerequisite for achieving economic resilience and stable growth • Low and stable inflation can be achieved with either a fixed or a managed floating exchange rate • External debt and current account positions become less of a concern if domestic macroeconomic policies are appropriate Concluding Remarks • Economic resilience is an important and useful concept for small states • Macroeconomic stability is critical to economic resilience • Good fiscal, monetary and exchange rate policies can foster macroeconomic stability and “nurture” economic resilience • Financial policies are also important for resilience; strong financial institution and access to global capitals • Despite the challenges small states face, it is in their best interest to adopt best-practice macroeconomic policies Closing Remark - Role of IMF • Given the challenges small states face, the IMF (and other international organizations) should provide technical assistance to them to put in policies that will increase resilience • They should also consider providing access to precautionary lines of credit so that these states can borrow when they are affected by an adverse economic shock