LECTURE ON MACROECONOMIC ISSUESJACK WU
IMBA, NCCU
QE Policy, Fiscal Cliff, Euro Zone Crisis, Abenomics
What is QE?
Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy.
A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money in order to inject a pre-determined quantity of money into the economy.
What are Conventional Monetary Policies?
Open Market Operation: Buy or sell short-term government bonds
Reduce or increase Discount RateReduce or increase bank reserve requirement
Problem faced by Conventional Monetary Policy
When short-term interest rates are either at, or close to, zero, normal monetary policy can no longer lower interest rates.
QE as an alternative way
Quantitative easing is used by the monetary authorities to further stimulate the economy by purchasing assets of longer maturity than only short-term government bonds, and thereby lowering longer-term interest rates
These financial assets include US treasury securities, mortgage-backed securities, and federal agency securities.
QE1~QE4 by FOMC
QE1 QE2 QE3 QE4
period March~October 2009
November 2010~June 2011
September 2012
December 2012
US Treasuries
299.9 Billion 772.7 Billion 45 Billion/month
Federal Agency debt
105.7 Billion -32.6 Billion
Mortgage-backed Securities
707.5 Billion -147.5 Billion
40 Billion/per month
40 Billion/month
Total outright holdings
1113.1 Billion
592.7 Billion
Impacts of QE Policy on USA
Raises Monetary BaseLower Interest RateIncrease inflation rateBeneficial to housing market and stock
marketIncreases the capital outflowUS dollar depreciates
What is Fiscal Cliff?
The fiscal cliff is a term referring to the effect of a number of laws which (if unchanged) could result in tax increases, spending cuts, and a corresponding reduction in the budget deficit beginning in 2013.
The budget deficit is expected to be reduced by roughly half in 2013. That sharp reduction is the cliff. It will reduce federal spending by $103 billion and increase tax revenues by $399 billion.
The Laws Leading to Fiscal Cliff
Tax increases due to the expiration of the Bush tax cuts (2010) and its extended acts
Spending cuts under the Budget Control Act of 2011, among others. The Budget Control Act of 2011 was enacted due to the failure of the 111th Congress to pass a Federal Budget and therefore as a compromise to resolve a dispute concerning the public debt ceiling.
Extended Acts of Bush Tax Cut
Dec. 2010: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act. The Act extended the Bush tax cuts for additional two years. (e.g. patch the exemption to Alternative Minimum Tax; reduce the social security payroll tax by 2%)
Beginning of 2012: Middle Class Tax Relief, and Job Creation Act. The Act extended the Bush tax cuts for an additional year.
Content of Budget Control Act
The Budget Control Act included an immediate increase in the debt ceiling. It also provided for automatic spending cuts to begin on January 2, 2013 if the government fails to decrease the deficit by $1.2 trillion over ten years.
The US government appears on the path to hit the $16.394 trillion federal borrowing limit sometime in January 2013.
Debt Ceiling
Impacts of Fiscal Cliff on USA
The Congressional Budget Office (CBO) estimates the sudden reduction will probably lead to a recession (-0.5% GDP growth rate) in early 2013 with the pace of economic activity picking up after 2013.
What is European Sovereign Debt Crisis?
Euro Zone Crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties.
Causes
the globalization of finance; easy credit conditions during the 2002–2008 period t
hat encouraged high-risk lending and borrowing practices;
the 2007–2012 global financial crisis; international trade imbalances; real-estate bubbles that have since burst; the 2008–2012 global recession; fiscal policy choices related to government revenues
and expenses; and approaches used by nations to bail out troubled
banking industries and private bondholders
PIGS
Portugal Italy (Ireland)Greece Spain
Examples
Ireland's banks lent the money to property developers, generating a massive property bubble. When the bubble burst, Ireland's government and taxpayers assumed private debts.
Iceland's banking system grew enormously, creating debts to global investors.
In Greece, the government increased its commitments to public workers in the form of extremely generous wage and pension benefits, with the former doubling in real terms over 10 years
Public Debt
Debt Ratio
Bond Interest Rate
Bank Crisis
German Bank
French Bank
British Bank
Italy Bank
European Bank
Greece 34 57 14 4 136
Italy 162 393 66 0 784
Portugal 37 27 24 4 195
Spain 182 141 107 30 632
Ireland 118 30 135 14 378
Impact of Euro Zone Crisis on Euro Zone
Debt Ratio GDP growth Unemployment
Greece 143 -4.5% 12.6% (12%)
Italy 119 1.3% 8.4% (10.9%)
Belgium 97 2.2% 8.3%(8.5%)
Ireland 96 -1% 13.7%(5.6%)
Portugal 93 1.3% 11% (4.5%)
Germany 83 3.6% 7.1% (8.2%)
France 82 1.5% 9.7% (10.4%)
Spain 60 -0.1% 20.1% (12.5%)
Impact of Euro Zone Crisis on Euro Zone
2010 2011 2012 2013
G20 2.9 1.5 1.5 2.2
USA 3.0 1.7 1.8 2.5
Euro 1.7 1.6 0.3 1.5
Japan 4.0 -0.5 2.1 1.5
China 10.4 9.3 8.6 9.5
Abenomics
Abenomics is a set of policy measures meant to resolve Japan‘s macroeconomic problems. Abe aims to expand the economy of Japan, still facing challenges related to the global economic recession, by a combination of measures such as aggressive quantitative easing from the Bank of Japan, a surge in public infrastructure spending, and the devaluation of the yen.
Specific Policies
Specific policies include inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan (BOJ), and revision of the Bank of Japan Act. Fiscal spending will increase by 2% of GDP, likely raising the deficit to 11.5% of GDP for 2013.
Results of Abenomics
In terms of results, the yen has become about 25% lower against the U.S. dollar in the second quarter of 2013 compared to the same period in 2012, with a highly loose monetary policy being followed. In addition, the unemployment rate of Japan has lowered from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013, continuing a past trend.