Macroeconomic Interrelationships and Informed …Macroeconomic Interrelationships and Informed Economic Policyyg Making Workshop for Staff of Ministry of National Planning and Economic

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 stabilityA 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 stabilityA 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




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


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


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


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


… and bust

p gp g

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

11


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


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

400180200220240

Real EERNominal EER

(Index, 2005=100)

cannot be financed

• If so, need to weigh

600

800

1000

1200120140160180 Kyat/USD (RHS, reverse)

risks of actions planned for reaching objectives and consider

1200

1400

16006080

100

05 06 07 08 09 10 11 12 13

13

recalibrating plans 200

200

200

200

200

201

201

201

201

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

OutlineOutline




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 & Forecasting Cycle

A P li A. Policy Objectives

nit

or

sts

/ ti

on

s

Mo

n

Fore

caP

roje

c t

C. Consistent Program

P j ti

B. Policy Measures ProjectionsMeasures

16


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


Baseline projection

Next step is generating a baseline projection for unchangedpolicies.

This requires:This requires:

• Macroeconomic framework that respects accounting identities bbetween sectors

• Understanding of key behavioral relationships

18


N t t lib ti li t h bj ti d

Forecasting—Consistent Program ProjectionsNext step: calibrating policy to reach objectives and maintain macroeconomic stability

This requires:

• Understanding of i i feconomic impact of

policy

It ti• Iterations

19


Fiscal Policies

Real Sector

G, T

PoliciesSector

Monetary financing/ h

Monetary financingInterest rates/exchange

rateCA=S-I

MonetaryPolicies

Balance of Payments RM=NFA+NDC

20


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


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

Documents

Macroeconomic Interrelationships and Informed …Macroeconomic Interrelationships and Informed Economic Policyyg Making Workshop for Staff of Ministry of National Planning and Economic