The Road to Recovery: Fiscal Stimulus, Financial Sector Rehabilitation, and Exit from Policy Easing

The worst of the global financial crisis is probably behind us, but the trajectory to recovery may vary widely across economies. Employing a dynamic structural multi-country model with a financial accelerator, this paper studies the role of three important policy actions in economic recovery: fiscal stimulus, financial sector rehabilitation and exit from policy easing. The main finding is that while both fiscal stimulus and financial sector rehabilitation contribute to economic recovery, the former is likely to be less effective from a medium-term perspective and may generate some negative side effects. This finding suggests that policy priority (of advanced economies in particular) should be on continued financial sector rehabilitation. Moreover, international policy co-ordination is beneficial as it can generate spillovers to regional economies. We also study the effects of over-estimation of the post-crisis potential output by the monetary authorities in advanced economies in their policymaking. We find that this may affect economic recovery in the region through inflationary pressure and the consequent policy tightening.GIMF model; Financial accelerator; Fiscal stimulus; Financial rehabilitation

Optimal monetary policy rules : theory and estimation for OECD countries

Zhang W. Optimal monetary policy rules : theory and estimation for OECD countries. Bielefeld (Germany): Bielefeld University; 2004.This dissertation focuses on monetary policy rules in the OECD countries at both theoretical and empirical levels. It is divided into seven chapters. Chapter 1 presents some recent literature on monetary policy rules and introduces the goal and organization of this dissertation. Chapter 2 explores some empirical evidence of IS and Phillips curves, because these two equations have become baseline framework of monetary policy. Both backward- and forward-looking behaviors are considered. A time-varying Phillips curve is also estimated. Chapter 3 discusses two important monetary policy rules: the money supply rule and the interest rate rule. Advantages and disadvantages of these two rules are explored. Chapter 4 explores time-varying monetary policy rules with Chow break-point test and Kalman filter. The estimation results indicate that there are some structural changes in the monetary policy in the countries studied. The author also simulates the Euro-area economy under the assumption that the Euro-area had followed the time-varying US monetary policy in the 1990s and concludes that the monetary policy seems to be too tight in the Euro-area in the 1990s. Chapter 5 explores monetary policy rules under uncertainty. The author first explores empirical evidence of model uncertainty with a state-space model with Markov-switching. Based on this evidence, the author then explores monetary policy under uncertainty with two approaches: the adaptive learning and the robust control. The results indicate that uncertainty does not necessarily require caution and that state variables do not necessarily converge even in a deterministic model with the adaptive learning. Chapter 6 then explores monetary policy with financial markets. The author endogenizes the probability for the asset price bubble to increase or decrease in the next period and derives a nonlinear policy rule. The author also simulates the economy with financial asset in the presence of the zero-interest-rate bound and concludes that monetary policy should not ignore financial markets. Chapter 7 presents some concluding remarks of the dissertation

How Dependent is the Chinese Economy on Exports and in What Sense has its Growth been Export-led?

This paper studies the interaction between foreign trade and domestic demand and supply in China¡¦s economic transformation. It compares China¡¦s export dependency with other economies using input-output analysis. The paper also conducts econometric analysis of provincial level data to examine causality between the growth of foreign trade and different components of domestic demand, and causality between the growth of foreign trade and total factor productivity. The main message is that China¡¦s export dependency is significantly lower than commonly thought. Moreover, the contribution of export to economic growth in China came mainly from its impact on total factor productivity growth from a supply perspective rather than its multiplier effect from a demand perspective. This relationship was found to be stronger in the more developed coastal areas than in the less developed inland areas.Export-led growth; Export dependency; Input-output analysis; Malmquist index

China's monetary policy: Quantity versus price rules

Two monetary policy rules, the money supply (quantity) rule and interest rate (price) rule, are explored for China in a dynamic stochastic general equilibrium model. The empirical results seem to indicate that the price rule is likely to be more effective in managing the macroeconomy than the quantity rule, favoring the government's intention of liberalizing interest rates and making a more active use of the price instrument. Moreover, the economy would have experienced less fluctuations had interest rate responded more aggressively to inflation.Monetary policy rules DSGE model Taylor rule

Monetary and Fiscal Policy Interactions in the Euro Area

Fiscal regime, Granger-causality, State-Space model, GMM,

The road to recovery: Fiscal stimulus, financial sector rehabilitation, and potential risks ahead

The worst of the global financial crisis is behind us, but the trajectory to recovery varies widely across economies. Employing a dynamic structural multi-country model with a financial accelerator, this paper studies the roles of two important policy actions in economic recovery: fiscal stimulus and financial sector rehabilitation. The main finding is that while both factors contribute to economic recovery, the former is likely to be less effective from a medium-term perspective and may generate some negative side effects. This suggests that policy priority should be on continued financial sector rehabilitation, particularly in advanced economies. Moreover, international policy co-ordination is beneficial as it can generate spill-over effects to regional economies. We also study a potential risk to economic recovery down the road: an over-estimation of the post-crisis potential output by the monetary authorities in advanced economies. It is found that this may lead to an overly accommodative monetary policy stance, which could lead to a resurgence in inflation and hence will darken the medium-term growth prospects of the world economy.GIMF model Financial accelerator Fiscal stimulus Financial rehabilitation

How Does the US Credit Crisis Affect the Asia-Pacific Economies? --- Analysis based on a General Equilibrium Model

The current financial crisis differs from most post-war recessions in that the balance sheets of both households and banks have been severely damaged, which could lead to structural changes in the behaviour of households. Therefore, it may exert some far-reaching effects on regional economies in the short run as well as in the medium term. This paper studies these effects using a multi-country dynamic structural model. In the short run, the US credit crisis weighs heavily upon the Asia-Pacific economies through financial linkages in addition to the traditional trade channel due to the deepening global financial integration. The relative importance of various financial channels differs notably across economies. While stock market contagion is more important for advanced economies, flight to quality across borders plays a key role in less developed economies. From a medium-term perspective, changes in the US household behavior caused by the credit crisis can help correct global imbalances, but the effectiveness hinges largely upon how long US households can maintain a reasonably higher savings rate. In addition, although the declining American public savings rate may not exert material impacts on the global imbalances, it can darken regional growth prospects due to a potentially higher world real interest rate.Global financial crisis; Financial contagion; Global imbalances

Structural Reform, Intra-Regional Trade, and Medium-Term Growth Prospects of East Asia and the Pacific --- Perspectives from a new multi-region model

This paper analyses the potential benefits from reforms aimed at promoting domestic demand in the region, as well as the effects of slower growth in the United States and the G3 on EMEAP economies.The analysis is based on simulation scenarios using an expanded version of the IMF Global Integrated Monetary and Fiscal (GIMF) model. The GIMF model is particularly useful for conducting medium-term policy analysis, because it incorporates rich layers of intra-regional trade, production, and demand that allow the transmission mechanism of structural reforms and external shocks to be fully articulated. The simulation results show that reforms to rebalance the pattern of demand in regional economies (such as Mainland China) more towards domestic demand could entail non-negligible benefits for the EMEAP. These benefits could be even larger for those economies that more flexibly adjust to the shift in China's trade pattern. The simulation results also illustrate structural reforms in EMEAP economies will allow them to reduce vulnerabilities to economic downturns in the major advanced economies.GIMF model, Slowdown; Demand rebalancing; Confidence effects