macroeconomic interrelationships and informed …macroeconomic interrelationships and informed...
TRANSCRIPT
Macroeconomic Interrelationships and Macroeconomic Interrelationships and Informed Economic Policy MakingInformed Economic Policy Makingy gy g
Workshop for Staff of Ministry of National Planning and Economic
Development Nay Pyi Taw, Myanmar
June 2 – 3, 2014
Jan Gottschalk
TAOLAMTAOLAM
IMF-TAOLAM training activities are supported by funding of the Government of Japan
OutlineOutline
I. Refresher: Objectives of Macroeconomic Policies
II. Macroeconomic Interrelationships: The Case of Fiscal Spending
III. Macroeconomic Monitoring and Forecasting
2This training material is the property of the International Monetary Fund (IMF) and is intended for the use in IMF courses. Any reuse requires the permission of the IMF.
Refresher:Refresher:Objectives of Macroeconomic PoliciesObjectives of Macroeconomic Policiesjj
General objectives of fiscal and monetary policies
• Promote sustainable economic growth and development
• High employment
• Macroeconomic stability:Macroeconomic stability:
Internal stability
E t l t bilit External stability
3
Refresher:Refresher:Objectives of Macroeconomic PoliciesObjectives of Macroeconomic Policies
Internal stabilityA idi h ti f th !A idi h ti f th !
jj
Avoiding overheating of the economy!Avoiding overheating of the economy!
• Demand ≈ Supply
• Output is close to potential
• Inflation pressures are moderate
4
Refresher:Refresher:Objectives of Macroeconomic PoliciesObjectives of Macroeconomic Policies
External stabilityA idi l dd f i h tfl !A idi l dd f i h tfl !
jj
Avoiding large, sudden foreign exchange outflows!Avoiding large, sudden foreign exchange outflows!
• Current account hl i b lroughly in balance
• Or current account deficits can bedeficits can be sustainably financedfinanced
5
OutlineOutline
I. Refresher: Objectives of Macroeconomic Policies
II. Macroeconomic Interrelationships: The Case of Fiscal Spending
III. Macroeconomic Monitoring and Forecasting
6
Macroeconomic Interrelationships:Macroeconomic Interrelationships:The Case of Fiscal SpendingThe Case of Fiscal Spending
Imagine you are going to scale up investment d
p gp g
spending:
For example, you may want to build public infrastructure supporting i t ti l t d
What are the risks for
international trade
macroeconomic stability?
7
Macroeconomic Interrelationships:Macroeconomic Interrelationships:The Case of Fiscal SpendingThe Case of Fiscal Spending
Risks for internal stability—impact on real sector:
p gp g
Large increase in investment spending raises demand for domestic goods and services to implement capital projects.
Is this a problem?
• If aggregate demand conditions were strong to begin• If aggregate demand conditions were strong to begin with, the economy could overheat
• Overheating economy would lead to rising inflation• Overheating economy would lead to rising inflation
• Bottlenecks in supply response would add to inflationary pressures
8
pressures
Macroeconomic Interrelationships:Macroeconomic Interrelationships:The Case of Fiscal SpendingThe Case of Fiscal Spending
Risks for internal stability—impact on
p gp g
monetary sector:
If increase in spending is central-bank financed, moneyIf increase in spending is central bank financed, money supply can increase, further fueling inflation
9
Macroeconomic Interrelationships:Macroeconomic Interrelationships:The Case of Fiscal SpendingThe Case of Fiscal Spending
Risks for internal stability—further impact on
p gp g
real and monetary sectors: Boom …
BoomingBooming economy and expansion in money supply can lead to
dit bcredit boom and housing bubbles
10
bubbles
Macroeconomic Interrelationships:Macroeconomic Interrelationships:The Case of Fiscal SpendingThe Case of Fiscal Spending
… and bust
p gp g
Bursting of bubble canbubble can lead to financial sector crisis and recession
11
Macroeconomic Interrelationships:Macroeconomic Interrelationships:The Case of Fiscal SpendingThe Case of Fiscal Spending
Risks for external stability—impact on BOP:
p gp g
Large increase in investment spending raises demand for imported goods and services to implement capital
j tprojects.
Is this a problem?
• If economy has sufficient foreign
hexchange reserves, no.
• Otherwise, risk of
12
,currency devaluation
Macroeconomic Interrelationships:Macroeconomic Interrelationships:The Case of Fiscal SpendingThe Case of Fiscal Spending
Risks for external stability—impact on BOP:
p gp g
Rise in inflation can lead to real appreciation of currency:
Is this a problem? Market and Effective Exchange Rates (EER) 1/(Index 2005=100)• Yes, if it leads to
persistently large current account deficits that
0
200
400180200220240
Real EERNominal EER
(Index, 2005=100)
cannot be financed
• If so, need to weigh
600
800
1000
1200120140160180 Kyat/USD (RHS, reverse)
risks of actions planned for reaching objectives and consider
1200
1400
16006080
100
05 06 07 08 09 10 11 12 13
13
recalibrating plans 200
200
200
200
200
201
201
201
201
1/ Auction rates (kyat/USD) are applied starting April 2012.
OutlineOutline
I. Refresher: Objectives of Macroeconomic Policies
II. Macroeconomic Interrelationships: The Case of Fiscal Spending
III. Macroeconomic Monitoring and Forecasting
14
Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting
What is to be done to avoid risks to b lmacroeconomic stability?
Macroeconomic impact of policy measures needs to be assessed to arrive at informed economic policy decision-making.
This requires:
• Monitoring of macroeconomic situation
• Forecasting of baseline without policy measures and policy scenario with measures
15
p y
Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting
Macroeconomic Monitoring & Forecasting Cycle
A P li A. Policy Objectives
nit
or
sts
/ ti
on
s
Mo
n
Fore
caP
roje
c t
C. Consistent Program
P j ti
B. Policy Measures ProjectionsMeasures
16
Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting
Monitoring
Taking stock of current macroeconomic situation is first step.
This requires:q• Price statistics • Real sector statistics
( ti l t )(national accounts)• BOP statistics• Fiscal sector
statistics• Monetary statistics
17
Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting
Baseline projection
Next step is generating a baseline projection for unchangedpolicies.
This requires:This requires:
• Macroeconomic framework that respects accounting identities bbetween sectors
• Understanding of key behavioral relationships
18
Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting
N t t lib ti li t h bj ti d
Forecasting—Consistent Program ProjectionsNext step: calibrating policy to reach objectives and maintain macroeconomic stability
This requires:
• Understanding of i i feconomic impact of
policy
It ti• Iterations
19
Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting
Fiscal Policies
Real Sector
G, T
PoliciesSector
Monetary financing/ h
Monetary financingInterest rates/exchange
rateCA=S-I
MonetaryPolicies
Balance of Payments RM=NFA+NDC
20
Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting
Th h ll i t t id i t k b t t l f
Forecasting—Dealing with uncertainty
The challenge is not to avoid mistakes but to learn from them:
L i f• Learning from mistakes (forecast error(forecast error analysis)
• IncrementalIncremental policy steps
21
Macroeconomic Monitoring and ForecastingMacroeconomic Monitoring and Forecasting
Forecasting and macroeconomic analysis—how TA can help:
• Improving statistics (STA, TAOLAM)
how TA can help:
• Building skills in macroeconomic analysis and forecasting (TAOLAM)
22
OutlookOutlook
Next, you will hear …
• … how monetary policy operations work
• and an analysis of the budget process in• … and an analysis of the budget process in Myanmar plus Treasury reforms currently underwayunderway
23