rethinking macroeconomic policy olivier blanchard giovanni dell’ariccia paolo mauro stockholm,...
TRANSCRIPT
Rethinking Macroeconomic Policy
Olivier BlanchardGiovanni Dell’AricciaPaolo Mauro
Stockholm, November 21st , 2011
The views in this presentation are those of the authors and do not necessarily represent those of the IMF
Pre-Crisis Consensus
One target for monetary policy: Low and stable inflation
One main monetary policy instrument: The policy interest rate
A limited role for fiscal policy
No cyclical role for prudential regulation
The proof of the pudding: The Great Moderation
Caveat: Differences between and among academics, central banks, politicians
2
Monetary Policy: One Target/One Instrument
Stable inflation (backed by theory and politics)
Low inflation (low prob. of Zero bound, but Japan…)
Connected markets and arbitrage (one rate does it all)
Expectation channel: Rule based policy
Financial intermediation largely ignored (with exceptions)
3
Asset prices a concern only through their impact on GDP and inflation
Bubbles difficult to identify
Ex-post policies effective and costs of clean up limited
Better clean up than prevent
Benign Neglect Approach to Boom/Busts
Financial Regulation Not a Cyclical Tool
Macro dimension of regulation largely ignored:
Focus on soundness of individual institutions Some exceptions in EMs
Cyclical use of prudential policies discouraged:
Seen as mingling with proper market functioning Little thought given to cyclical rules on capital ratios,
LTV ratios (exceptions: Spain, Colombia)
The Great Moderation
Steady decrease in the variability of output and inflation in advanced countries
Sources? Luck, structural changes, improved monetary policy?
Successful responses to the financial scares. 1987 stock market crash, LTCM, Tech bubble burst
6
Bust had enormous consequences
Standard policies rapidly hit their limits
Limited effectiveness of less traditional policies
Large fiscal and output costs
Then the Crisis Came …
Reflections on the Crisis
Stable inflation: Necessary but not sufficient
Limits of very low inflation
Reconsider “benign neglect”
Financial intermediation is macro relevant
8
Before Crisis Inflation and Growth Looked OK
-3
-2
-1
0
1
2
2000 02 04 06 08:Q4
Output Gap2Core CPI Inflation
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2000 02 04 06 08:Q4
Euro area United States Average of other economies1
1 Japan omitted.2 Estimate of output gap using rolling Hodrick-Prescott filter.
-40
-20
0
20
40
60
80
JP
N
DE
U
AU
T
PR
T
CH
E
NL
D
GR
C
US
A
ITA
NO
R
FIN
AU
S
CA
N
SW
E
DE
N
GB
R
FR
A
IRL
NZ
L
ES
P
Change in real house prices (2001:Q4-2006:Q3)
Real house price falls from recent peak
But Houses Prices Were Rising Rapidly
Note: Real house price falls from recent peaks not shown for Germany and Japan as real price declined through the 2001:Q4-2006:Q3 period.
11
R2 = 0.60
-0.05
0
0.05
0.1
0.15
0.2
-5 0 5 10 15
And Credit Booms Fueled Vulnerabilities
JPN
DEU
FIN
GBR
NLD
CHE
ITA
USACAN
NOR
IRL
ESP
DEN
FRA
SWE
Growth Rate of Nominal Credit relative to GDP and Household Quick Ratio(percent)
Average growth rate of nominal credit relative to GDP (2002:1-2006:3)
Av
era
ge
an
nu
al
pe
rce
nta
ge
po
int
ch
an
ge
in
ho
us
eh
old
q
uic
k r
ati
o (
lia
bil
itie
s/l
iqu
id a
ss
ets
)
GRC
BEL
AUT
PRT
12
0
1
2
3
4
5
6
7
Jan-07 Jan-08 Jan-09
United States
United Kingdom
Euro area
Limited Monetary Policy Room (policy rates in percent)
Jun-09
Financial Intermediation Matters
When normal investors exit, markets become segmented
Arbitrage fails, and prices can deviate far from fundamentals
Policy rate no longer a sufficient instrument for policy
Credit easing and quantitative easing can affect rates and asset prices, given policy rate
13
What We Should Explore Going Forward
If low/stable inflation not enough, what should monetary policy target?
If benign neglect is dead, then what?
More targets means more tools: what role for macroprudential policies?
14
Monetary Policy Many targets:
Inflation/output gap Exchange rate Asset prices: Housing, stocks, etc
But also many instruments:
Policy interest rate Reserve accumulation Macro prudential instruments
Cyclical capital/liquidity ratios Loan to value ratios, margin requirements
15
Problems and trade offs with more interventionist strategy remain:
Bubbles difficult to detect in real time (China real estate)
Risks with pricking bubbles (including for policy makers)
Traditional policies may be ineffective (speculative demand))
And have large costs
Benign neglect approach may be dead, but…
Not all asset-price booms should be target of policy But how to choose?
Some consensus emerging that culprit is leverage (Nasdaq crash was fine)
Housing markets are special: Leverage (link to crises) Large storage of wealth Major supply-side effects Network externalities
Booms in Housing Markets Are Particularly Dangerous
Boom, Leverage, and Defaults
AUS
AUT
BGR
CAN
CHN
HRV
CYP
CZEDNK
EST
FIN
FRA
GRC
HUN
ISL
IND
IRL
ITA
KOR
LVALTU
NLD
NZL
NOR
POL
PRT
SVN
ZAFESP
SWE
CHE
UKR
GBR
USA
y = -0.0416x - 4.1152R² = 0.1496
-30
-20
-10
0
10
-20 0 20 40 60 80 100 120 140 160 180 200 220 240
Cum
ulat
ive
dec
line
in G
DP
fro
m s
tart
to e
nd o
f re
cess
ion
Change in house prices f rom 2000 to 2006
Figure 2. House Price Run-Up and Severity of Crisis
Source: Claessens et al (2010).
Bubble size shows the change in bankcredit f rom 2000 to 2006.
Real Effects of House Busts
Make borrowing more expensive and may limit leverage and risk taking
But: Too blunt: costly for the entire economy (unless in
context of general overheating) Issues for small open economies Effect on speculative component may be limited
Panel VAR suggests impact on house prices at considerable cost to GDP growth 100 basis points reduce house price appreciation by 1
but also lead to a decline of 0.3 in GDP growth
The Policy Rate and House Price Bubbles
Most ‘experiments’ in emerging markets, particularly Asia
Common tools: Maximum LTV/DTI limits Differentiated risk weights on high-LTV loans Dynamic provisioning
Discretion rather than rule-based
Mixed evidence on effectiveness
Macro-Prudential Tools
Hong Kong: Limited Effectiveness of LTV Limits
110
120
130
140
150
160
70
90
110
130
150
170
2009 - Mar 2009 - May 2009 - Jul 2009 - Sep 2009 - Nov 2010 - Jan 2010 - Mar 2010 - May 2010 - Jul
New loans approved Prices
October 2009:Maximum LTV for properties over HK$20 million lowered to 60 percent, maximum loan size for mortgage insurance eligibility reduced and non-owner-occupied properties disqualified.
August 2010:LTV for properties over HK$12 million lowered to 60 percent, applications for mortgage insurance exceeding 90% LTV and 50% DTI suspended, maximum loan size for mortgage insurance eligibility if LTV>90%.
Korea: Effective LTV Limits, but Difficult Calibration?
0
1
2
3
4
5
6
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2000 - Jan 2001 - Apr 2002 - Jul 2003 - Oct 2005 - Jan 2006 - Apr 2007 - Jul 2008 - Oct 2010 - Jan
September 2002:Introduced LTV limits
June 2003:Lowered LTV in speculative areas
October 2003:Lowered LTV in speculative areas
July 2009:Lowered LTV in non-speculative areas
February 2007:Tightened DTI
August 2005:Introduced DTI limits
September 2009:Tightened DTI
Month-on-month house price changes in 'speculation zones' (LHS)
Policy rate (RHS)
Pragmatic and discretionary, mobilized within existing institutional frameworks, targeted at specific markets
Some evidence of temporary cooling effect on markets and building of buffers for bad times
Too early to judge impact on aggregate cycles and interaction with other policies
Macro-prudential policy still in its infancy
Macro-prudential tools first line of defense Target leverage Strengthen balance sheets
Monetary policy definitely to be involved when there are other signs of overheating
But may have to come into play anyway if macroprudential tools are ineffective
Tentative Policy Taxonomy for Real-Estate Booms
Who does what? Where should macro-prudential authority reside?
Relationship among policies? To what extent are these independent tools?
Rules versus discretion? Far away from IT standards Risks associated with excessively interventionist policy
Important Open Questions
Conclusions: An evolution, not a revolution
Low (but how low?) and stable inflation still essential
Low deficits and fiscal room even more needed than before
Monetary policy: Many targets and instruments
New macroprudential tools/ Coordination with monetary policy
Important questions of institutional design27
Thank You
28
29
Widespread Declines in Output Volatility
Emerging Markets and Developing Countries
Asia
Latin America
Africa and the Middle East
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
7
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Selected Advanced Economies
US
EU15
1
1.5
2
2.5
3
3.5
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006