Transcript Monetary Policy & Oil Crisis

Oil Crisis
February 2003
Economics 272
Prof. Smitka
Policy Tools
• Japanese banking differs (in the post-WWII
period) from the US in key aspects
– Banks that are national in scope (11 "city" banks and 3
special-purpose banks)
– Lack of government bond market
• "Dodge Plan" of 1949 restricted deficit financing
• Interest rate regulation
– As in the US, fixed deposit interest rates
– Also (on paper) regulated lending rates
• Unregulated interbank "call" rate, cf. Fed Funds
Households
Postal Savings
Regional
Banks
FILP
Infrastructure
other Gov't Lending
Interbank
Market
City
Banks
Life
Insurance
Short-term
Long-term
Corporations
Financial institutions
• City banks at core
– typically net borrowers in the interbank market
• Regional banks, credit associations, etc
– Far fewer financial institutions than in the US
• Government policy "banks" (lending only)
– Financed with FILP funds
• Postal savings system (deposits only)
– Supplied FILP funds
Corporate Finances
• Corporate finance was:
– Own funds (retained earnings)
– Bank borrowings
– No bond market, little use of equities after 1963
• Personal savings was:
– Banks (including postals savings)
– Also life insurance (higher returns)
– Real assets (real estate)
Flow of funds
• Hence funds flowed from:
– Households
– To firms
– Via banks
• Hence funds flowed from:
– Regional banks (with lots of branches) to
– City banks (fewer branches, commercial focus)
• Except when BOJ imposed tight money
Monetary Policy Tools
• Hence "open market" operations were not possible.
– No gov't bonds to buy / sell!
– Note this changed from the mid-1980s; Japan today has
the ability to trade bonds
• Discount window lending
– Reserves were borrowed from BOJ
– BOJ could ask city banks to adjust credit creation
• Discount rate as visible signal
Why Monetary Policy?
• Obvious:
– Business cycle
• Tighten money conditions when inflation
threatens
• Make money "easy" in recessionary periods
– Financial stability
• Intervene in times of crisis [?? no macro
impact]
Why monetary policy?
• Non-obvious
– Foreign exchange constraints
• Fixed exchange rate after April 1949
– Dodge Plan set at ¥360 per US$
• Japan was not credit-worthy: borrowing not an
option, assets (US$ foreign reserves) minimal
– In boom trade balance X-M = X-mY turns negative,
except through chance export boom
– BOJ must slow to cut growth (Y) and thus imports
Sum
• A pronounced business cycle
– Tightening when balance of payments moved
into the red
– Tightening when inflation rose
• But high-growth environment
– Otherwise, investment very high
– BOJ expanded money supply through discount
window to support
-3.0%
GDP growth rates
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
Real GDP Growth
15.0%
12.0%
9.0%
6.0%
3.0%
0.0%
Business Cycle Details
• When trade deficit rose
– Either too fast domestic growth, or slow
exports (US recession)
•
•
•
•
Money growth was tightened
GDP growth slowed
Import growth slowed / imports fell
Money growth allowed to rise again
Implication
• Japanese growth in the 1960s was not
"Keynesian"
– Cycles not driven by whims of investors and
consequent swings of invesment and (through
the multiplier) GDP
– Instead, BOJ deliberately caused slowdowns
• And, implicitly, allowed speedups
• As per the following chart:
Inflation and Business Cycle
• In effect, the economy tended to overheat, which
showed up first in imports and a trade deficit
• Poor investor sentiment (an exogenous recession)
were not issues
– the BOJ "caused" all the recessions
• But inflation - in the CPI - was high by US
standards
– Average was about 6% in the 1960s
– BOJ reacted to an uptick in 1970
No issue here!!
Trade Data
• As can be seen here, no problem with
imports in 1969
• The second chart traces movements in the
discount rate as an indicator of shifts in
monetary policy
Prime Minister Kakuei Tanaka, 1972
田中角栄
• 列島改造計画 Plan to Rebuild the Japanese Archipelago
– Slowdown ca. 1970 encouraged fiscal policy
– Tanaka started in the construction industry, used that to raise
campaign funds for faction / political party
• 1971 ¥/$ appreciation: end of “Bretton Woods”
– huge inflow of dollars, bought to lessen forex shift but boosted
money supply / lowered interest rates
• Sum: stimulative MP, FP
– Double-digit inflation by 1973
Oil Crisis
• October 6, 1973 Yom Kippur War
– OPEC already more active
– Boom not just in Japan but also US, Europe
• I worked overtime, 7 days / week, at UAW wages …
• Demand made cartel discipline moot
– Oil prices quadrupled
• Japan imported 99+% of oil
• Huge boost in inflation
• Inflation jumped to 25%
– Panic buying: shoppers trampled to death buying TP
Bank of Japan reaction
see also next charts on forex rate, discount rate and call rate
April 1973
4.5% --> 5%
May 1973
5.5%
July 1973
6%
August 1973
7%
December 1973
9%
April 1975
Began lowering
1975.10
1975.07
1975.04
1975.01
1974.10
1974.07
1974.04
1974.01
Call Rate
1973.10
1973.07
1973.04
Yen per dollar
1973.01
1972.10
1972.07
1972.04
1972.01
1971.10
1971.07
1971.04
1971.01
1970.10
1970.07
1970.04
1970.01
Foreign Exchange Rate
Discount Rate
360
14.00%
350
13.00%
340
12.00%
330
11.00%
320
10.00%
310
9.00%
300
8.00%
290
7.00%
280
6.00%
270
5.00%
260
4.00%
Analytic issues
• Time lags
– Recognition
– Implementation
– Impact
• Time consistency
– Short-run versus long-run
• Structural issues
– Institutional change renders historical relationships (model
parameters) misleading
Monetarist models
• MP = ? … what should be goals?
• MV  PY … an identity: true by definition
– M is money stock
– V is velocity, ability of a given amount of
money to support economic activity
– P is price level, Y real GDP
• So PY is nominal GDP
• Can this framework be used?
MV  PY
• IF velocity “V” is stable
• AND the link between nominal and real
GDP is predictable
• THEN can tie changes in money supply to
changes in “P” – that is, inflation
• But in fact
– V is noisy and shifts with institutional change
– PY is not easy to decompose
Sample arithmetic
• MV  PY…to use, add growth rates
– M plus 5%
• V ±2% since volatile / large error component
– Then PY can range from +7% to +3%
• Real Y avg +2% but can fall as much as -1%
– [increase can be more short-run, coming out of recession]
– So P can range from:
• 7% - (-1%) = 8%
• 3% - 2% = 1%
• Monetarist framework offers little insight under “normal”
growth rates of US and post-1973 Japan
Sample arithmentic #2
• M = +25%
• V ±2% as before
– Then PY can range from 27% to 22%
– Even with real Y = +5% inflation is high
– But oil crisis ---> Y = -2% [or worse!]
• So inflation 24% ≈ 29%
• High “M” growth is indicative of problems
Money Supply
M1
Currency
Deposits
M1 Growth
600,000
35.0%
30.0%
500,000
25.0%
400,000
20.0%
300,000
15.0%
200,000
10.0%
100,000
5.0%
1977.01
1976.07
1976.01
1975.07
1975.01
1974.07
1974.01
1973.07
1973.01
1972.07
1972.01
1971.07
1971.01
1970.07
1970.01
1969.07
0.0%
1969.01
0
Other aspects
• FP side effects
– Implications of lifetime consumption model
• MP side effects
– Do you really want low investment to persist?
– Are big swings in forex rates desirable?
• International side effects
– How to respond to exogenous forex shifts?
Queries
• What happens to "V" if the BOJ boosts the money
supply but no one wants to borrow?
• What should the BOJ do when the source of
inflation:
– is a negative supply-side shock?
– is a positive demand-side shock?
• Should the BOJ ignore the international side of the
economy, post-1971 [yen not fixed]?
– See chart on forex, esp post-1985 movements
BOJ Dis cou nt Rate
Targ et Cal l Rate
6.0 0%
Aug 30, 199 0
5.0 0%
Ju l 1, 199 1
interest rate s
ke pt h igh for 1 8
mon ths foll owing
the "bub ble's" p eak
4.0 0%
3.0 0%
Christmas 1989
rate hike
– "b ubbl e" pe aks –
Nov 1, 1986
fol lowing
"Plaza Accord"
2.0 0%
Sept 8, 1995
0.5 %
dis cou nt ra te!!
Feb 12, 199 9
"Zero Interest
Rate Policy"
co mmen ces
May 31, 198 9
firs t an ti-"Bub ble"
rate hike
1.0 0%
Feb 23, 198 7
200 0/10 /22
200 0/4/22
199 9/10 /22
199 9/4/22
199 8/10 /22
199 8/4/22
199 7/10 /22
199 7/4/22
199 6/10 /22
199 6/4/22
199 5/10 /22
199 5/4/22
199 4/10 /22
199 4/4/22
199 3/10 /22
199 3/4/22
199 2/10 /22
199 2/4/22
199 1/10 /22
199 1/4/22
199 0/10 /22
199 0/4/22
198 9/10 /22
198 9/4/22
198 8/10 /22
198 8/4/22
198 7/10 /22
198 7/4/22
198 6/10 /22
198 6/4/22
198 5/10 /22
198 5/4/22
198 4/10 /22
198 4/4/22
198 3/10 /22
0.0 0%