EC104 Topic 11 (2)

amarjotsidhu's version from 2015-06-06 16:40

Section 1

Question Answer
What happened during 2008/2010 crisis?countries living beyond their means (excessive borrowing without the growth to sustain it); standard of living increases without corresponding increases in TFP; slowing TFP following ICT introduction; limited investment gains; poor regulation and political incentives; Chinese government undervaluation (lack of capital mobility from China)
Contributing factors to crisissubprime credit extension; securitisation; ratings capture; inadequate regulation; moral hazard; political economy of inequality (political divisiveness prevented reform); business cycle; failure of early warning models (predicted growth)
Bank runsbanks wanted to stop lending and sell assets = made things worse -> sold assets at a loss and reduced velocity of money in economy; poor regulatory framework; recent financial crises more severe on average in countries with very high quality financial regulation = need for shock absorbers
Global financial crisis impact on worlddestroyed $26 trillion of world stock market value; increased unemployment by 20% in the world; reduced incomes in developed economies by up to 5%
Trigger of financial crisisend of US housing boom (similar to GD); small subprime mortgage losses set a run n banks = crisis less about trigger and more about macroeconomic situation of the time
State of financial crisis on brink of crashincreasingly complex securitisation; heightened leverage (everyone borrowed as much as they can)
Subprime mortgage extensiongovernments seek to raise home ownership = increasing housing loans, especially to poor; GDP share of finance in US without any reason or TFP growth; subprime mortgage lending increased significantly; poorly packaged debt caused problems when no-one knew value of underlying asset ; increasing inequality
US household debt vs. income in 2007127%
Inequality in USGovt. not taxed properly = those who are rich gain more power = can manipulate policy
Chinese undervaluationsome estimates as high as 30%; undervalued Chinese exchange rate = US BP current account deficit
Asia vs US financessavings glut in Asia; US, on the other hand, is permissive of very highly leveraged balance sheets; excessive risk taking and exposure to financial crisis vs. Asian self insurance and exchange rate reserve building
Failure in terms of exchange rate policy (international)right of members to choose exchange rate regime vs. obligation of members to promote a stable system of exchange rates and avoid manipulating exchange rates
Failure of IMF in terms of exchange rate policyresponsibility of IMF to oversee compliance with regulations. BUT, IMF has avoided making key judgement and had no mechanism to enforce any rulings and has no bargaining power with countries that do not need to borrow from it

Section 2

Question Answer
How bad was 2008/10 vs. GD?not as bad as gd; big fall in GDP/capita but not a massive movement from trend; similarly rapid collapse for Western Europe but less extreme for Japan; Eurozone well below potential GDP estimates
Problems with Eurozoneno fiscal union, debt problems, no political union, no banking union, not economically symmetric (north-south disconnect)
Germany benefits from staying in Eurozonecan run a current account surplus compared to other countries which are running deficits. Over time, the DM would have appreciated by running a surplus but by being pegged to a currency with poorly performing economies, Germans benefit from low exchange rate
Govt. debt issues in Eurozone in 2014Greece = 176.1% of GDP; Italy = 130.6%; Portugal = 127.2%
Gains from European integration - Baier (2008)EU 2000 income levels 26.1% higher than if integration still at 1950 levels
Gravity model - EU tradeEU raises trade between 2 members between 100-125% after 15 years
Role of global institutionsapproach = opposite of gd; central banks engaged in aggressive expansionary monetary policy; governments ran budget deficits to stimulate demand side; governments have actively prevented bank failures; trade has been actively encouraged (WTO, NAFTA)
policy responsevigorous policy action at the national level = aggressive monetary and fiscal stimuli; no 'golden fetters' = individual response possible (except Eurozone)
Role of IMFnot dealing with underlying issues; committed loans to greece, ireland and portugal to supplement ecb support; loan agreements entail major fiscal consolidations; increase in IMF lending capacity; too small in 2008 to be a lender of last resort; by forcing countries to save money, we are reducing investment at a time when it costs nothing to borrow (people willing to buy bonds at 0%)
Need for new policies (Mitchener and Mason)promote investment, subsidise earnings through low interest rates, reallocate assets away from finance, encourage savings, resolve the failed institutions and punish offenders
Esteovadeordal and Taylorliberalisers have grown faster than on liberalisers after WC; structure of protection matters more for growth e.g. poor countries are net imports of capital and intermediate goods
Goldman Sachs on long term outlook for BRICs post crisisChina could become as big as US by 2027; China, Brazil and India have done better than expected; big gains in technology use e.g. mobile phones, across BRICs + notably improvements in BRICs of political conditions (corruption, rule of law) but they have made little progress in human capital (life expectancy and schooling)
Joyce on what we should blame for collapse of Bretton Woodsa generation had passed since the depression and capital flows were no longer seen as destabilising but private capital flows emerged and they were incompatible with fixed exchange rate and national autonomy over policy
Rodrik and Subramanian on cause of India's growthattitudinal shift on the part of the national government in 1980 in favour of private business (while the rhetoric of the congress party had previously been about socialism and pro poor policies); Indira Gandhi dropped this rhetoric and aligned herself with private sector ; policy changes pro business; large productivity response to attitude and policy shift as india was far away from its PPF; india's growth took place from 1980, not the conventional view of 1991
Crafts and Fearon on key elements of emergency economic support in a crisisprovide resources for growth, reallocate financial industry assets, resolve failed institutions
Crafts and Fearon on 1930s protectionist trade policymade recession worse
Perenbroom on Chinese statechina has already made transition from hard authoritarianism to soft authoritarianism. remaining transition to liberal state = inevitable.
Brandt and Rawski on chinese modernisationmodernisation will cause expansion of political elite = more disagreement = political transition
Brandt and Rawksi on corruption in Chinaincreasing corruption as China decentralises
Brandt and Rawksi on need for reform in Chinachinese ability to maintain political legitimacy through economic reform = lack of political reform in healthcare, education, environment and corruption needed
Crafts on what determined whether a country was likely to leave gold during GDa country was more likely to leave gold if its main trading partner did, if it had returned to hold on a high parity, if it was a democracy or if the central bank was independent
Crafts on the Euro area 5 years after the current crisispoor economic performance continues (prolonged recession, high unemployment, low inflation); high levels of public debt are unfavourable to growth (reduce scope and effectiveness of fiscal stimulus , higher long term interest rates); macroeconomic trilemma points to the exist of periphery countries from Euro to gain higher competitiveness from policy sovereignty;