UNIT 4- Global economic growth and policies Flashcards
Three key facts about economic fluctuations
- Economic fluctuations are irregular and unpredictable
- Most macroeconomic variables fluctuate together. Although they fluctuate by different amounts
- As output falls, unemployment rises.
After the 2009 global recession
Following a short-lived initial rebound in activity in 2010, the global economy, and especially EMDEs, suffered a decade of:
- weak growth –> despite unprecedented expansionary monetary policy, and several rounds of fiscal stimulus in major economies.
An expansionary policy- increase of money supply
If the money supply increases, the interest rate will be lower in the new equilibrium of the money market
–> Aggregate demand will increase
–> GDP will increase
A contractionary monetary policy- decrease of money supply
If the money supply decreases, the interest rate will be higher in the new equilibrium of the money market
–> Aggregate demand will decrease
–> GDP will decrease
Are EMDEs ready to face a global downturn?
To answer this questions the authors:
- examine developments of the past decade
- draws lessons for EMDEs
- discuss policy options
Three main messages in the book- message 1:
Perhaps for the first time, many EDEs were able to implement large-scale countercyclical fiscal and monetary policy during the global recession.
- They were in a position to stimulate activity because they could draw on sizable shock absorbers accumulated during the pre-recession period of strong growth : government debt had fallen, current account and fiscal deficits narrowed, and inflation had moderated.
- Those EMDEs with more resilient economies and with more forceful stimulus experienced milder growth slowdowns during the global recessions.
Three main messages in the book- message 2:
On a more cautionary note, the study warns that, in case of a sharp global downturn, the average EMDE would be less prepared to address it than before the 2009 recession.
- EMDEs generally are more vulnerable to external shocks, in part between mountain debt, weakening demand for commodity exports, and slower underlying domestic growth.
- Trade disputes among major economies are chipping away at an important engine of EMDE growth.
- At the same time, weaker fiscal positions would make it more difficult for EMDEs to support activity with expansionary fiscal policy.
Three main messages in the book- message 3:
There are some reasons for optimism. Since the 1997-98 Asian crisis and the 2001 US recession – the two global downturns that preceded the 2009 global recession – policy frameworks in EMDEs have become more resilient.
- For example, the number of EMDEs with inflation-targeting monetary policy regimes and the number with fiscal rules has risen considerably since 1997.
- While the effectiveness of these rules-based policy frameworks has varied, they have facilitated effective countercyclical responses by these economies during the global recession of 2009 and could be a source of strength in the face of future shocks.
Since 1950:
- the global economy has experienced a global recession in almost every decade (1975, 1982, 1991 and 2009)
- These four episodes were characterized by highly synchronized downturns
in global trade, industrial production, capital flows, employment, and energy consumption - they were triggered by different types of shocks and each exhibited unique features, but they were all accompanied by financial crisis
A global recession is defined as:
A contraction in global real pr capita GDP
Global recessions on a graph:
The numbers are BELOW 0
Global downturns on a graph:
The numbers are above 0, but worse than the years before
The global recession in 1975:
Followed the shock to global oil prices triggered by the Arab oil embargo in October 1973
-The embargo ended in March 1974, but the supply shock associated with the sharp rise in oil prices quickly generated a substantial increase in inflation and significant decline in growth in many countries
- An era of stagflation started with disappointing growth but high and unstable inflation.
The global recession in 1982:
Was triggered by a second oil price shock, a tightening of monetary policies in advanced economies, and the Latin American debt crisis
-Oil prices rose sharply in 1979, partly owing to to disruption caused by the Iranian revolution, and this helped push the inflation to new highs in several advanced economies
- The increase in global interest rates and a collapse of commodity prices in the early 1980s made it difficult for several latin American countries to service their debts, resulting in debt crises in the region.
- Advanced economies were able to recover quickly, but the debt crisis contributed to long-lasting growth slowdowns in many EMDEs in Latin America and the Caribbean and in Sub-Saharan Africa.
The global recession in 1991:
Resulted from the confluence of a wide range of shocks:
1) The gulf war was associated with heightened geopolitical uncertainty and a sharp increase in oil prices, which adversely affected global activity.
2) In central and Eastern Europe and the former USSR, the transition to a market economy was accompanied by high inflation and output contractions.
3) In the United states, widespread weakness of lending institutions from the mid-1980s weighed on the housing market.
4) Scandinavian countries had severe banking crisis in the early 1990s
5) In the European Union, problems with the European monetary system’s exchange rate mechanism in 1992 were accompanied by sharp declines in activity in many member countries.
6) In Japan, the bursting of an asset price bubble resulted in a recession and a prolonged period of low growth and near-zero inflation.
