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Sustaining the recovery.
Challenges on the supply and the demand side
Olivier Blanchard
January 3, 2009
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1. The Supply Side: Potential Output
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Direct legacy: Scrambling rather than cleansing ?
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Weak banks and tight lending for awhile
SMEs and growth
Indirect:
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A more regulated financial sector.
More stable but lower growth? The EM experience
Changes in composition:
Less housing, less real estate and finance
More net exports here (US), less there (EMs)
More productivity growth here (US), less there. (EMs)
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The evidence
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From past financial crises. Level loss in output
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Different this time? Looking at the U.S.:
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Evidence from productivity growth during the crisis
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Two ways of looking at it
Evidence from output and inflation
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Using evidence from output, inflation, capacity utilization
Not so good news
Following Banking Crises, Output Losses are
Significant and Sustained
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Output Losses
(per capital GDP; percent deviation from pre-crisis trend)
10
0
-10
-20
-30
-1
0
1
2
3
4
5
6
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Figure reports mean difference from pre-crisis trend (over t-10 to t-3); t=-1 normalized to 0; crisis begins at t=0.
Inner shading indicates 90% confidence interval for the mean; outer shading indicate inter-quartile range.
US: Behavior of output per hour during recessions
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Output per Hour
Output per Hour 1/
(in percent; cumulative residuals)
(index=100 at cyclical peak, t=0)
3.5
105
104
Current
2000
1990
1980-81
3.0
2.5
Current
103
2000
2.0
1990
1980-81
102
1.5
1.0
101
0.5
100
0.0
99
-0.5
98
-1.0
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
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1/ x-axis measured in quarters; 0 denotes peak in output; diamond markers indicate trough of recession).
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U.S. GDP and Potential GDP Forecasts Versus WEO April 2007
(indices; potential GDP 2007=1)
1.25
1.20
1.15
1.10
1.05
1.00
0.95
0.90
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
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2. The Demand Side
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Increase in saving, more so here (US consumers) than
elsewhere.
For the moment, partly offset through fiscal, but not forever.
Textbook adjustment:
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Lower interest rates, more so here than elsewhere.
Higher aggregate demand.
Induced exchange rate adjustment.
Increase in NX here, decrease in NX there.
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What will U.S. Consumers Do?
U.S. Household Saving Ratio
(ratio to disposable income)
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Household Saving Ratio
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WEO Projection
VAR Projection
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5
4
3
2
1
0
1990
1994
1998
2002
2006
2010
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Serious Complications:
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Room to decrease interest rates is limited.
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Back to the savings glut.
Alternatives: Structural policies?
 Increasing investment. (Green investment? Not enough.)
 Decrease saving where desirable.
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Implied exchange rate adjustments.
Delicate combination. What if not?
Real Interest Rates
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(from breakeven inflation)
4.5
4.0
3.5
3.0
2.5
U.S.
2.0
1.5
Euro area
(5-yr)
1.0
0.5
0.0
00
01
02
03
04
05
06
07
08
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