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Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
Paul van den noord   2010 11 08 growth drivers com
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Paul van den noord 2010 11 08 growth drivers com

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    • 1. How to hit three birds with one stone: growth, fiscal sustainability and global rebalancing Paul van den Noord OECD
    • 2. Objectives <ul><li>Many OECD countries start from a situation of severe macroeconomic imbalance: </li></ul><ul><li>Large output gaps </li></ul><ul><li>Severe fiscal imbalances: already increased debt + budget balances well below levels consistent with stabilising debt </li></ul><ul><li>World current account balances rising again </li></ul><ul><li>How should policies respond? </li></ul>
    • 3. Tools <ul><li>Economic Outlook 87 projections to 2011 + stylised “ Baseline scenario ” to 2025 generated with “mechanical” MTB model ( OECD WP 482 ) </li></ul><ul><li>Simulations of alternative scenarios with the OECD Global model ( OECD WP No 768 ) considering different combination of policies </li></ul><ul><ul><li>Faster fiscal consolidation </li></ul></ul><ul><ul><li>Faster consolidation + structural reform </li></ul></ul>
    • 4. OECD potential output reduced after crisis
    • 5. Key fiscal & x-rate assumptions <ul><li>Fiscal consolidation +½% GDP pa in the underlying primary balance for as long as it takes to stabilise debt. </li></ul><ul><li>When gross government debt > 75% of GDP then long-term interest rates increase by 4 bp per % point increase in the government debt-to-GDP ratio (Japan an exception) </li></ul><ul><li>Exchange rates unchanged in real terms for OECD countries, for other countries based on Balassa-Samuelson effect </li></ul>
    • 6. Large increase in government debt <ul><ul><li>Consolidation over entire period for US, Japan, UK, Ireland, but still .. </li></ul></ul><ul><ul><li>OECD government gross debt stabilises at level +44% pt relative to pre-crisis. 10 countries gross debt > 100% of GDP (only 3 before the crisis) </li></ul></ul><ul><ul><li>Upward pressure on long-term interest rates due to higher debt. </li></ul></ul>
    • 7. Global current account imbalances still large
    • 8. Faster consolidation scenario <ul><li>Sufficient fiscal consolidation across OECD countries to reduce government debt to the pre-crisis levels by 2025 (except Japan where only ½ of the increase in debt is reversed) </li></ul><ul><li>Fall in long-term interest rates due to lower government indebtedness occurs immediately as fiscal consolidation plans are assumed to be credible for financial markets </li></ul><ul><li>Consolidation hurts in short-term , multipliers of order ½ to 1 (bigger if no support from monetary policy), but longer term benefits through lower interest rates and cost of capital. </li></ul>
    • 9. Main results <ul><li>Consolidation reduces short-term growth (multipliers ½ to 1, bigger if mopo constrained). But faster pace of consolidation than baseline possible after 2011/12 still consistent with closing of GAP. </li></ul><ul><li>Growth and output higher in the medium term </li></ul><ul><li>Important cross country differences coming from size of fiscal consolidation + level of interest rates (Japan) </li></ul><ul><li>Limited exchange rate adjustment helps reduce the deficit in the US and surplus in non OECD Asia but this is compensated by wider imbalances elsewhere </li></ul><ul><li>=> Fiscal consolidation is necessary but not sufficient to get balanced long-term growth </li></ul>
    • 10. Fiscal consolidation scenario
    • 11. Additional structural reform <ul><ul><li>Non-OECD Asia : Lower net saving (3% of GDP)+ rebalancing of demand </li></ul></ul><ul><ul><ul><li>Higher social spending in Asia </li></ul></ul></ul><ul><ul><ul><li>Deepening of financial markets & improving business environment </li></ul></ul></ul><ul><ul><ul><li>Looser fiscal stance in non Asia OECD where possible </li></ul></ul></ul><ul><ul><ul><li>Additional RMB appreciation (20%) </li></ul></ul></ul><ul><ul><li>US : Higher private saving (1% of GDP)+rebalancing of demand </li></ul></ul><ul><ul><ul><li>Improved financial regulation </li></ul></ul></ul><ul><ul><ul><li>Tax reform </li></ul></ul></ul><ul><ul><ul><li>Additional $ depreciation (10%) </li></ul></ul></ul><ul><ul><li>Euro area : higher potential growth (mainly thru NAIRU) </li></ul></ul><ul><ul><ul><li>Lower product and labour market regulation </li></ul></ul></ul><ul><ul><li>Japan : lower net private saving (2% of GDP) </li></ul></ul><ul><ul><ul><li>Lower product market regulation </li></ul></ul></ul><ul><ul><ul><li>Corporate sector reform </li></ul></ul></ul><ul><ul><ul><li>Deepening of financial markets </li></ul></ul></ul>
    • 12. Main results <ul><ul><li>Japan : exit deflation more durably, higher nominal output growth and a further reduction in debt ratio </li></ul></ul><ul><ul><li>China : Short-term inflation pressures better contained. Lower surplus </li></ul></ul><ul><ul><li>Euro area : stronger growth </li></ul></ul><ul><ul><li>United States : lower current account deficit </li></ul></ul><ul><ul><li>Global imbalances lower and put on a declining path. </li></ul></ul><ul><ul><li>Higher medium-term level of output (by 2-3% in 2025) and growth rate in the OECD </li></ul></ul>
    • 13. A more balanced scenario
    • 14. A more balanced scenario
    • 15. A more balanced scenario
    • 16. A more balanced scenario
    • 17. Conclusions <ul><li>Fiscal consolidation , necessary but not sufficient. It could delay recovery, but shouldn’t derail it. </li></ul><ul><li>Structural reform & exchange rate adjustment also necessary for balanced medium-term growth. </li></ul><ul><li>More on timing, instruments of fiscal consolidation in the 18 November OECD Economic Outlook . </li></ul>

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