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.