Download GDP and Economic Policy

PFTAC GDP Compilation and
Forecasting Workshop
GDP and economic policy
Suva, Fiji
October 19, 2016
Economic management
•
GDP estimates and forecasts are important for
sound macroeconomic management and
monetary and fiscal policy.
•
Having timely and accurate GDP estimates and
forecasts is crucial for empirical based policy
(advice).
2 of 20
Economic activity
•
A useful concept to analyze economic activity is
to decompose GDP into:
– Temporary business cycle effects and
– Long-run, full capacity, potential output
16
Actual (measured) output
14
•
Output gap = 0:
supply = demand,
no inflationary pressures
•
Output gap > 0:
supply < demand,
inflationary pressures
•
Output gap < 0:
supply > demand,
downward pressure on
prices
Output
12
10
8
6
Output gap
Potential output
4
2
0
5
10 15 20 25 30 35 40 45
Time
3 of 20
Factors influencing potential output
•
Capital stock
•
Population growth rate
•
Natural disasters
•
External linkages
•
Financial development, financial stability
•
Property rights, legal system, political stability
•
Taxation
•
Government expenditure
•
…
4 of 20
Factors influencing the business cycle
•
External shocks (e.g. global financial crisis, world
food prices, oil prices)
•
Weather
•
Interest rates
•
Exchange rate
•
Fiscal policy
•
Consumer and business confidence
•
…
5 of 20
Economic management
•
As economists our advice to policy makers is
guided by improving welfare and wellbeing.
•
The aim is to improve ‘economic efficiency’, i.e.
produce more with less resources.
•
Economic policies, regulation, institutions, public
spending can increase economic efficiency and
hence productive capacity.
•
Some government spending has been found to be
productive, e.g. on basic education and health,
infrastructure.
6 of 20
Economic management
•
Government spending can increase productive
capacity if it is in areas that:
–
the private sector does not invest in because other
people cannot be excluded from benefitting from the
spending (e.g. street lights, roads)
–
people and businesses invest less in than what is
socially optimal (e.g. education, people around us
benefit from our education but we did not take this into
account when deciding how much or how hard to study)
7 of 20
GDP, potential output and fiscal policy
•
Knowing where we are in the business cycle is
important for fiscal forecasting.
•
For example, if the economy is recovering from a
severe slowdown it might take some time before
corporate income tax collection picks up …
•
… if businesses can carry forward losses, which
they can in most countries.
8 of 20
Cyclically adjusted fiscal balance
•
We don’t want fiscal policy to contribute to the
business cycle, e.g. increase spending when the
economy already is operating above capacity.
•
We want our governments to set aside some
money during boom times because we know that
they will be followed by an economic slowdown.
•
We want governments to only commit to quality
spending that it can afford now and in the future.
9 of 20
Exchange rate
•
The exchange rate is the price of the domestic
currency in terms of foreign currency.
•
If demand for a currency goes up, the price of the
currency goes up, i.e. it appreciates.
•
If demand for a currency goes down, the price of
the currency goes down, i.e. it depreciates.
•
E.g. when imports go up, more USDs are needed
to pay for imports, i.e. the demand for domestic
currency relative to USDs declines (depreciation).
•
If tourist arrivals increase, the demand for
domestic currency increases (appreciation).
10 of 20
GDP and monetary policy
•
Central banks in open economies face a trilemma.
•
They can only pursue two of the following three
policies simultaneously:
1. A fixed foreign exchange rate
2. Free capital movement
3. An independent monetary policy
•
Countries in the region have a fixed exchange rate.
•
The nominal exchange rate against other
currencies or a basket of currencies is not freely
floating but set and maintained by the central
bank.
11 of 20
GDP and monetary policy
•
With a fixed foreign exchange rate and free capital
movement, a country cannot have independent
monetary policy.
•
If the US Federal Reserve increase interest rates,
to maintain the exchange rate the central bank
also needs to raise the interest rate.
•
Otherwise money would flow out of the country to
earn a higher rate of return in the United States.
•
This would lower the demand for and price of the
domestic currency.
12 of 20
GDP and monetary policy
•
With a fixed exchange rate and capital controls,
the country can have independent monetary
policy, i.e. set interest rates.
•
The exchange rate is controlled by controlling how
much the country transacts with the rest of the
world.
13 of 20
GDP and monetary policy
•
With a fixed exchange rate foreign reserves
become important …
•
… to maintain the level of the domestic currency
by buying or selling foreign currencies
•
… to ensure sufficient foreign currencies are
available to pay for imports.
•
Changes in foreign reserves result from
transactions between the domestic country and
the rest of the world.
14 of 20
GDP and monetary policy
•
These transactions, i.e. trade in goods and
services, financial transactions including foreign
investment and remittances, are captured in the
balance of payments.
•
To forecast foreign reserves requires forecasts of
the balance of payments which require GDP
forecasts.
•
For example, a lot of machinery and equipment is
imported.
•
An increase in investment will increase imports
and all else equal reduce foreign reserves to pay
for the imports.
15 of 20
GDP and monetary policy
•
In most countries the nominal exchange rate is
not fixed indefinitely but adjusted from time to
time.
•
And it should be adjusted if it is causing
imbalances in the economy, i.e. excess demand
or supply.
•
Excess demand and supply can be measured with
the output gap.
16 of 20
In summary
•
GDP is important.
•
It is probably the most important macroeconomic
variable.
•
To give empirical based policy advice we need
accurate estimates of GDP …
•
… and we need time series data.
•
More accurate estimate will give better forecasts.
•
The impact of policy changes often only become
apparent with a lag.
•
We need to take a medium-term outlook.
17 of 20
Pleas
To the statistics offices
•
Given limited resources it may not be feasible to
produce ‘official’ historical data, e.g. with
rebasing or changes in methodology.
•
Unofficial data would help!
•
It could be produced by the statistics office or
some reputable data user.
•
Maybe it could be published on the statistics
office’s website with an appropriate disclaimer
regarding quality? The statistics office website is
where most users look / should look first for data.
18 of 20
Pleas
To the statistics offices
•
If historical series (official or unofficial) cannot be
constructed, please provide on your website all
data published in the past …
•
… in Excel and unrounded.
To the ministries of finance
•
Please fund your statistics offices!
19 of 20
Pleas
To the tax administrations
•
Please share taxpayer data!
•
It will immensely improve the accuracy and
quality of GDP estimates.
•
The statistics office is subject to the same
confidentiality rules as you are sometimes even
stricter.
To the central banks
•
You probably use the data the most.
•
Share the knowledge you gain from using the
data.
20 of 20