Transcript Impacts of QE Policy, Fiscal Cliff, and Euro Zone Crisis

QE Policy, Fiscal Cliff, Euro
Zone Crisis, Abenomics
LECTURE ON MACROECONOMIC ISSUES
JACK WU
IMBA, NCCU
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 Rate
 Reduce 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 shortterm 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~Octob
er 2009
November
2010~June
2011
September
2012
December
2012
US Treasuries
299.9 Billion
772.7 Billion
Federal
Agency debt
105.7 Billion
-32.6 Billion
Mortgagebacked
Securities
707.5 Billion
-147.5 Billion
Total outright
holdings
1113.1 Billion
592.7 Billion
45 Billion
/month
40 Billion/per
month
40 Billion
/month
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
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






that 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.