LECTURE ON MACROECONOMIC ISSUES

1
QE Policy, Fiscal Cliff, Euro Zone Crisis,
Abenomics

• LECTURE ON MACROECONOMIC ISSUES
• JACK WU
• IMBA, NCCU

2
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.

3
What are Conventional Monetary Policies?

• Open Market Operation Buy or sell short-term
  government bonds
• Reduce or increase Discount Rate
• Reduce or increase bank reserve requirement

4
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.

5
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.

6
QE1QE4 by FOMC
QE1 QE2 QE3 QE4
period MarchOctober 2009 November 2010June 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
7
Impacts of QE Policy on USA

• Raises Monetary Base
• Lower Interest Rate
• Increase inflation rate
• Beneficial to housing market and stock market
• Increases the capital outflow
• US dollar depreciates

8
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.

9
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.

10
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.

11
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.

12
Debt Ceiling
13
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.

14
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.

15
Causes

• the globalization of finance
• easy credit conditions during the 20022008
  period that encouraged high-risk lending and
  borrowing practices
• the 20072012 global financial crisis
• international trade imbalances
• real-estate bubbles that have since burst
• the 20082012 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

16
PIGS

• Portugal
• Italy (Ireland)
• Greece
• Spain

17
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

18
Public Debt
19
Debt Ratio
20
Bond Interest Rate
21
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
22
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)
23
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
24
Abenomics

• Abenomics is a set of policy measures meant to
  resolve Japans 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.

25
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.

26
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.