Macroeconomic Interrelationships and Informed Macroeconomic Interrelationships and Informed Economic

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  • Macroeconomic Interrelationships and Macroeconomic Interrelationships and Informed Economic Policy MakingInformed Economic Policy Makingy gy g

    Workshop for Staff of Ministry of National Planning and Economic

    Development Nay Pyi Taw, Myanmar

    June 2 – 3, 2014

    Jan Gottschalk TAOLAMTAOLAM

    IMF-TAOLAM training activities are supported by funding of the Government of Japan

    OutlineOutline

    I. Refresher: Objectives of Macroeconomic Policies

    II. Macroeconomic Interrelationships: The Case of Fiscal Spending

    III. Macroeconomic Monitoring and Forecasting

    2This training material is the property of the International Monetary Fund (IMF) and is intended for the use in IMF courses. Any reuse requires the permission of the IMF.

  • Refresher:Refresher: Objectives of Macroeconomic PoliciesObjectives of Macroeconomic Policiesjj

    General objectives of fiscal and monetary policies • Promote sustainable economic growth and development

    • High employment • Macroeconomic stability:Macroeconomic stability:  Internal stability

     E t l t bilit External stability

    3

    Refresher:Refresher: Objectives of Macroeconomic PoliciesObjectives of Macroeconomic Policies

    Internal stability A idi h ti f th !A idi h ti f th !

    jj

    Avoiding overheating of the economy!Avoiding overheating of the economy!

    • Demand ≈ Supply • Output is close to

    potential • Inflation pressures

    are moderate

    4

  • Refresher:Refresher: Objectives of Macroeconomic PoliciesObjectives of Macroeconomic Policies

    External stability A idi l dd f i h tfl !A idi l dd f i h tfl !

    jj

    Avoiding large, sudden foreign exchange outflows!Avoiding large, sudden foreign exchange outflows!

    • Current account hl i b lroughly in balance

    • Or current account deficits can bedeficits can be sustainably financedfinanced

    5

    OutlineOutline

    I. Refresher: Objectives of Macroeconomic Policies

    II. Macroeconomic Interrelationships: The Case of Fiscal Spending

    III. Macroeconomic Monitoring and Forecasting

    6

  • Macroeconomic Interrelationships:Macroeconomic Interrelationships: The Case of Fiscal SpendingThe Case of Fiscal Spending

    Imagine you are going to scale up investment d

    p gp g

    spending: For example, you may want to build public infrastructure supporting i t ti l t d

    What are the risks for

    international trade

    macroeconomic stability?

    7

    Macroeconomic Interrelationships:Macroeconomic Interrelationships: The Case of Fiscal SpendingThe Case of Fiscal Spending

    Risks for internal stability—impact on real sector:

    p gp g

    Large increase in investment spending raises demand for domestic goods and services to implement capital projects.

    Is this a problem?

    • If aggregate demand conditions were strong to begin• If aggregate demand conditions were strong to begin with, the economy could overheat

    • Overheating economy would lead to rising inflation• Overheating economy would lead to rising inflation • Bottlenecks in supply response would add to inflationary pressures

    8

    pressures

  • Macroeconomic Interrelationships:Macroeconomic Interrelationships: The Case of Fiscal SpendingThe Case of Fiscal Spending

    Risks for internal stability—impact on

    p gp g

    monetary sector: If increase in spending is central-bank financed, moneyIf increase in spending is central bank financed, money supply can increase, further fueling inflation

    9

    Macroeconomic Interrelationships:Macroeconomic Interrelationships: The Case of Fiscal SpendingThe Case of Fiscal Spending

    Risks for internal stability—further impact on

    p gp g

    real and monetary sectors: Boom … BoomingBooming economy and expansion in money supply can lead to

    dit bcredit boom and housing bubbles

    10

    bubbles

  • Macroeconomic Interrelationships:Macroeconomic Interrelationships: The Case of Fiscal SpendingThe Case of Fiscal Spending

    … and bust

    p gp g

    Bursting of bubble canbubble can lead to financial sector crisis and recession

    11

    Macroeconomic Interrelationships:Macroeconomic Interrelationships: The Case of Fiscal SpendingThe Case of Fiscal Spending

    Risks for external stability—impact on BOP:

    p gp g

    Large increase in investment spending raises demand for imported goods and services to implement capital

    j tprojects.

    Is this a problem? • If economy has sufficient foreign

    hexchange reserves, no.

    • Otherwise, risk of

    12

    , currency devaluation

  • Macroeconomic Interrelationships:Macroeconomic Interrelationships: The Case of Fiscal SpendingThe Case of Fiscal Spending

    Risks for external stability—impact on BOP:

    p gp g

    Rise in inflation can lead to real appreciation of currency: Is this a problem? Market and Effective Exchange Rates (EER) 1/

    (Index 2005=100)• Yes, if it leads to persistently large current account deficits that

    0

    200

    400 180 200 220 240

    Real EER Nominal EER

    (Index, 2005=100)

    cannot be financed

    • If so, need to weigh

    600

    800

    1000

    1200 120 140 160 180 Kyat/USD (RHS, reverse)

    risks of actions planned for reaching objectives and consider

    1200

    1400

    160060 80

    100

    05 06 07 08 09 10 11 12 13

    13

    recalibrating plans 2 00 20 0

    20 0

    20 0

    20 0

    20 1

    20 1

    20 1

    20 1

    1/ Auction rates (kyat/USD) are applied starting April 2012.

    OutlineOutline

    I. Refresher: Objectives of Macroeconomic Policies

    II. Macroeconomic Interrelationships: The Case of Fiscal Spending

    III. Macroeconomic Monitoring and Forecasting

    14

  • Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting

    What is to be done to avoid risks to b lmacroeconomic stability?

    Macroeconomic impact of policy measures needs to be assessed to arrive at informed economic policy decision- making.

    This requires:

    • Monitoring of macroeconomic situation • Forecasting of baseline without policy measures and policy scenario with measures

    15

    p y

    Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting

    Macroeconomic Monitoring & Forecasting Cycle

    A P li A. Policy Objectives

    ni to

    r

    st s /

    tio

    ns

    M on

    Fo re

    ca Pr

    oj ec

    t

    C. Consistent Program

    P j ti

    B. Policy Measures ProjectionsMeasures

    16

  • Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting

    Monitoring Taking stock of current macroeconomic situation is first step.

    This requires:q • Price statistics • Real sector statistics

    ( ti l t )(national accounts) • BOP statistics • Fiscal sector

    statistics • Monetary statistics

    17

    Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting

    Baseline projection Next step is generating a baseline projection for unchanged policies. This requires:This requires: • Macroeconomic

    framework that respects accounting identities bbetween sectors

    • Understanding of key behavioral relationships

    18

  • Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting

    N t t lib ti li t h bj ti d Forecasting—Consistent Program Projections Next step: calibrating policy to reach objectives and maintain macroeconomic stability

    This requires: • Understanding of

    i i feconomic impact of policy It ti• Iterations

    19

    Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting

    Fiscal Policies

    Real Sector

    G, T PoliciesSector

    Monetary financing / h

    Monetary financing Interest rates/exchange

    rate CA=S-I

    Monetary Policies

    Balance of Payments RM=NFA+NDC

    20

  • Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting

    Th h ll i t t id i t k b t t l f Forecasting—Dealing with uncertainty The challenge is not to avoid mistakes but to learn from them:

    L i f• Learning from mistakes (forecast error(forecast error analysis)

    • IncrementalIncremental policy steps

    21

    Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting Forecasting and macroeconomic analysis— how TA can help: • Improving statistics (STA, TAOLAM) how TA can help:

    • Building skills in macroeconomic analysis and forecasting (TAOLAM)

    22

  • OutlookOutlook

    Next, you will hear …

    • … how monetary policy operations work • and an analysis of the budget process in• … and an analysis of the budget process in Myanmar plus Treasury reforms currently underwayunderway

    23