Download Emergence in the Post-Crisis World: Increasing Asymmetries between Advanced and Emerging Economies

CENTRAL BANK OF THE REPUBLIC OF TURKEY
Emergence in the Post-Crisis World:
Increasing Asymmetries between Advanced
and Emerging Economies
Mehmet Yörükoğlu
Deputy Governor
RBWC Conference, July 2012
1
Increasing Asymmetries between
Advanced Economies
and
Emerging Economies
2
Growth Differential
Growth Rates
(annual change)
10
8
6
4
2
0
-2
Advanced Countries
-4
Emerging Countries
-6
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2002
2003
2004
2005
2006
2007
2008
2009
2010 2011
Source: Bloomberg, CBRT
3
Inflation Differential
Core Inflation
(annual change)
5
Advanced Countries
4
Emerging Countries
3
2
1
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
0
Source: Bloomberg, CBRT
4
Policy Rate Differential
Policy Rates
(percent)
12
10
Advanced Countries
Emerging Countries
8
6
4
2
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
0
Source: Central Banks, CBRT
5
There has been almost a constant wedge in average inflation
and policy rates ...
Differences in Inflation and Monetary Policy
• Asymmetry in consumer baskets between
advanced and EMEs.
– Food is more significant in the baskets of EMEs.
• Food prices have potential to rise due to
– Rapid growth of EMEs,
– Lack of sufficient agricultural productivity growth in EMEs and
developing economies,
– Rapid employment shift from agriculture to industries in EMEs.
– High-tech consumer products are more significant in
the consumer basket of advanced economies.
• Rapidly declining price and increasing quality of especially
CIT products.
– New-good bias
Differences in Monetary Policy
• Convergence dynamics together with the
consumer basket asymmetries;
– Inflation in EMEs and has a relatively upward
pressure;
– EME Central Banks are more concerned about
inflation whereas advanced countries’ Central
Banks are more concerned about growth.
– In EMEs and developing economies,
• Tighter monetary policy and fiscal policy
• Exchange rate appreciation
• Higher inflation targets
New-good bias
Price Profile after Innovation
• New good’s price
declines rapidly after
introduction. (curve
AD)
price
A
• It enters into the CPI
baskets of the
advanced and
developing economies
at times Ta, and Te,
respectively.
B
C
D
Ta
Te
time
• The price decline along
the curve (BC) is not
accounted in EME’s
inflation measurement.
New-good bias
• In the last couple of decades:
– Growth is mainly through innovation of new
goods, i.e. Speed of innovation has
increased;
– Diffusion of new goods is faster;
– Price profile is steeper.
New-good bias has become more
significant.
Diffusion of Products
100
90
Percent of households with
80
70
60
50
40
Range
Telephone
Electricity
Automobile
Radio
Refrigerator
Washer
Airconditioning
Dishwasher
Dryer
ColorTV
Microwave
VCR
Computer
Cellular
30
20
10
0
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Year
Diffusion Half Lives
Years it took until 50% adoption rate
70
60
Telephone
Electricity
Range
50
Dishwasher
Automobile
Washer
40
Radio
Air-conditioner
Microwave oven
30
Refrigerator
Dryer
Computer
Color TV
20
VCR
Cellular Phone
10
0
1860
Internet
1880
1900
1920
1940
Introduction Year
1960
1980
2000
Average Price of a New Car (in 1929 ($000))
(Nonhedonic)
2.7
2.5
2.3
2.1
Average Price
1.9
1.7
1.5
1.3
1.1
0.9
0.7
0.5
1910
1920
1930
Year
1940
Number of Cars per Household
0.9
0.8
Cars per household
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
1910
1920
1930
Year
1940
1950
Price Profile after Innovation for Automobiles
Figure 11 Price Profile after Innovation
3.5
3
P r ic e
2.5
model
data
2
1.5
1
0.5
0
5
10
15
20
Year
25
30
35
Disinflation Pressure due to Innovation
Figure 8 Disinflation Pressure from Innovation
D is in f la t io n a r y C o n t r ib u t io n
0.045
0.04
0.035
0.03
0.025
0.02
0.015
0.01
0.005
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Fraction of Northern Income
0.8
0.9
1
Consequences
Because of consumption basket differences and
the new-good bias;
– Measured inflation in emerging economies is
relatively higher;
– Emerging economy central banks need to employ
tighter monetary policy;
– Significant appreciation pressure on emerging
economy currencies.
As a result,
i) except the naturel resource rich ones, EMEs
face high current account deficit, and as a result are
subject to potential financial stability challenges.
ii) Convergence slows down.
What can be done ...
Compared to advanced economies, EMEs
should employ
• higher inflation targets,
• multi-tool monetary policy,
• macroprudential tools,
• tight fiscal policy.
Real exchange rates and public debt