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  1. 1. Economics for Journalists Week 7: Government Economic Policy Jeffrey TimmermansMonday, 18 March, 13
  2. 2. Review: Economic IndicatorsMonday, 18 March, 13
  3. 3. Economic goals of governments ✤ Full employment ✤ or at least as full as possible... ✤ Steady annual growth in output ✤ without overheating ✤ Stable prices (low but steady rise in inflation)Monday, 18 March, 13
  4. 4. Writing about GDP ✤ Usually, it’s best to use seasonally adjusted quarter-on-quarter growth in GDP in percentage terms ✤ This shows the current momentum of an economy, without seasonal peaks & troughs ✤ Compare with the same figure in the previous quarter ✤ Be wary of revisions of earlier figures! ✤ Will the government be issuing a forward-looking forecast?Monday, 18 March, 13
  5. 5. Japan grows but stays fragile By Mure Dickie in Tokyo and Robin Kwong in Taipei 21 May 2010 Change Japans economy grew a relatively robust 1.2 per cent in the first quarter but full recovery from the worst postwar slump depends on demand from foreign export Future markets and a rebound in private consumption that may be faltering. Preliminary gross domestic product data released yesterday were equivalent to an annualised growth rate of 4.9 per cent - below economists forecasts but still an refutation of fears last year that the economy might stall in early 2010 or suffer a Expectations "double dip". Naoto Kan, the finance minister, said the data reflected a "solid economic recovery" but made clear it was too soon to relax. "We need to watch very closely to see if this is an autonomous recovery," he said. It can be dangerous to read too much into Japans preliminary estimate of GDP, a statistic often revised heavily. In the third quarter of last year, for example, the economy was initially thought to have expanded 1.2 per cent but was later judged to have contracted and is now Context recorded as having expanded 0.1 per cent. However, yesterdays first-quarter estimate left no doubt of Japans continuing reliance on external demand for growth, with net exports of goods and services accounting for 0.7 percentage points of the 1.2 per cent quarter-on-quarter Cause expansion. The Japanese data offered some signs that Japans recovery was broadening, with growth in all categories of public demand, including residential investment, which declined sharply throughout 2009. "Rising exports and production have spilled over to domestic demand," wrote Kiichi Murashima, economist at Citigroup Global Markets, in a research note. Comment But the pace of quarter-on-quarter growth in private consumption softened considerably, falling to 0.3 per cent - its weakest performance since the first three months of last year - suggesting a waning effect of government stimulus efforts. Much could now depend on the impact on consumption of a monthly Y13,000 ($145, €118, £102) child allowance introduced by the Democratic party-led government. Some analysts say many parents are likely to save rather than spend the windfall. FutureMonday, 18 March, 13
  6. 6. Writing about CPI ✤ Focus on the percentage change, rather than the nominal index level ✤ Use CPI as a proxy for the inflation rate ✤ Using core on non-core depends on your audience ✤ Core inflation is used to determine economic policy responses ✤ Non-core is better to show effects of inflation on consumersMonday, 18 March, 13
  7. 7. Japan Consumer Prices Fall 1% By Tomoyuki Tachikawa 1 October 2010 TOKYO -- Japans consumer prices fell in August for the 18th consecutive month, Change government data showed Friday, suggesting no end in sight for a deflationary trend that has been undermining the broader economy, and providing further impetus for the Bank of Japan to take additional monetary easing measures soon. The countrys core consumer price index, which excludes volatile fresh food prices, Cause fell 1.0% from the same month a year earlier, the Ministry of Internal Affairs and Communications said. The result was in line with the median forecast in a poll of private economists. Expectations The latest data show that the pace of decline in the core CPI is easing up, with the figure having fallen 1.1% in July and 1.0% in June compared with a recent low of 1.5% in April. This suggests that a mild recovery in the economy is propping up Context domestic demand and preventing prices from falling further. But analysts warn that deflation may accelerate as the yen stays strong with the outlook for the U.S. and European economies uncertain, dragging on Japans export- Future reliant economy and reducing the prices of oil, food, metals and other commodities the country buys from overseas. Persistent price declines usually eat into corporate profits, which could prompt firms to scale down operations and cut payrolls, increasing the risk that worsening income and employment conditions will make consumers reluctant to spend. That in turn should raise the possibility of Japans economy entering a lull in the near future. "As long as deflation continues and the yen rises, falling corporate profits could keep putting downward pressure on the economy," said Takeshi Minami, chief economist at Comment Norinchukin Research Institute. "Its very likely for the Japanese economy to stall down the road." Tokyo policymakers have also become more concerned over the future course of Japans economy. FutureMonday, 18 March, 13
  8. 8. Unemployment Rate ✤ Tracks the number of people in the labor force who don’t have jobs ✤ How do you define “labor force”? ✤ Usually expressed in percentage terms rather than an absolute number ✤ Full employment is a bad thing!Monday, 18 March, 13
  9. 9. Problems with unemployment data ✤ Based on a household survey ✤ Doesn’t include people who have given up looking for work ✤ Definitions of “unemployment” vary among countries ✤ Japan’s definition is more restrictive than the U.S.’sMonday, 18 March, 13
  10. 10. Grim Milestone as Jobless Rate Tops 10% By Sudeep Reddy 9 November 2009 The unemployment rate last month soared above 10% for the first time since the early 1980s, a milestone likely to weigh on consumer confidence and stir new efforts in Washington to spur job creation. Some 558,000 people joined the ranks of the jobless in October, sending the rate to 10.2% and the tally of officially unemployed Americans to 15.7 million, the Labor Department said. The 10% figure could overshadow last weeks news that the economy began growing again this summer after a long contraction. "Ten percent is a terribly important number," Democratic pollster Peter Hart said. "It is not only the 10.2% of the people who are unemployed, it is the number of people who are reliant on that 10%. Its probably the other 20% who say, Im worried, Im uncertain, Im afraid about this, I worry about my job." The report intensified pressure on the government to provide more unemployment relief and spur hiring. President Barack Obama on Friday signed an extension of jobless benefits for up to 20 weeks. He said his administration was considering new investment in infrastructure, as well as tax cuts for businesses, to stimulate employment. "History tells us that job growth always lags behind economic growth," Mr. Obama said, "which is why we have to continue to pursue measures that will create new jobs." The unemployment news initially sent stocks lower. But the market ended up modestly on hopes that job growth would return by early next year. The payroll figures werent entirely bleak. The survey of employers showed fewer jobs lost in October than in previous months; figures for August and September were revised up. The temporary employment sector, seen as an indicator of future employment, gained 34,000 jobs to mark the third straight month of increases. The rest of the business and professional- services sector grew, as did education and health jobs. Factory overtime hours increased. Still, October marked only the second time since recordkeeping began in 1948 that the jobless rate topped 10%. It stayed that high for 10 months in the early 1980s, peaking at 10.8% in November and December of 1982. Economists expect the unemployment rate to continue rising at least until spring, even as gross domestic product resumes growing. The 10.2% rate "reinforces a view on Main Street that recovery is spelled j-o-b-s and not G-D-P," said Stuart Hoffman, chief economist at PNC. "Were in a sort of economic purgatory where we see growth in productivity and growth in output, and even some growth in consumer spending. But it hasnt been sustained long enough for businesses to create jobs." Sectors slammed hardest in the recession continued to suffer. Manufacturing lost 61,000 jobs, more than in the prior three months. Construction employment fell by 61,000, near the pace of prior months. Retail declined by 40,000 jobs. A measure of unemployment that includes people who have stopped actively searching for work, or are working part-time because they cant find full-time work, hit 17.5% in October -- up half a percentage point from September. Tom OPray, 36 years old, of Rockville, Md., lost his job as a hotel waiter a year ago and spent six months looking for a full- time position. Mr. OPray applied to as many as four openings a week as an executive assistant -- a prior occupation of his -- but stopped looking in April. "There are so many overqualified applicants that I never made it to the top of the stack to ever get an interview," Mr. OPray said. He went to the movies with a friend and -- "on a lark," he said -- asked the theater manager if he had jobs. There was a part- time position, paying $7.85 an hour, that included concession sales and cleaning restrooms. "Id prefer another office job," he said. "Im working harder, for less money, than I ever have in my whole life." The economys course in coming months will depend on how well it can transition from growth backed by government support -- such as the $787 billion stimulus package -- to an expansion built on the private sector.Monday, 18 March, 13
  11. 11. Consumer/Business Confidence Index ✤ A leading indicator of short-term consumer spending or investment by businesses ✤ Often presented as a diffusion index ✤ How many respondents are confident minus how many are pessimistic ✤ A reading of above 50 indicates optimism ✤ Compare to previous month/quarter for changes in sentimentMonday, 18 March, 13
  12. 12. Problems with confidence indices ✤ Can have relatively large margin of error ✤ How big is the survey? ✤ Can mask dramatic changes in consumer or business sub-groups ✤ In the case of the tankan, check the sub-index for smaller businessesMonday, 18 March, 13
  13. 13. Some other indicators ✤ Consumer Confidence ✤ Balance of Payments, including Trade Balance ✤ Industrial Production ✤ Retail Sales ✤ Tourist Arrivals ✤ Home Sales/Land SalesMonday, 18 March, 13
  14. 14. Government Economic PolicyMonday, 18 March, 13
  15. 15. Two types of policy ✤ Fiscal policy ✤ Monetary policy ✤ Taxation ✤ Discount rate ✤ Government spending ✤ Required reserve ratio ✤ Open-market operations ✤ Quantitative easing Finance Ministry/ Central Bank Treasury Dept.Monday, 18 March, 13
  16. 16. Taxation ✤ Changes to tax policy can alter economic incentives ✤ Broad-based tax cuts can incentivize spending ✤ Targeted tax cuts/exemptions/credits can affect investment decisions ✤ Mortgage tax exemption ✤ Capital gains taxesMonday, 18 March, 13
  17. 17. Government spending ✤ To expand the economy, government spending must use borrowed money (deficit spending) ✤ The impact of government spending is multiplied, depending on how much people spend and how much they save ✤ As the economy begins to grow, businesses and consumers tend to invest and consume moreMonday, 18 March, 13
  18. 18. Circular Flow with LeakageMonday, 18 March, 13
  19. 19. Spending multiplier +100 +100 Step 1: GDP = C + I + G + (E - I) +80 +80 20% saved Step 2: GDP = C + I + G + (E - I) +64 +64 20% saved Step 3: GDP = C + I + G + (E - I) Total Increase in GDP: 100 + 80 + 64 + ...Monday, 18 March, 13
  20. 20. Evolution of monetary policy ✤ Until the 20th Century, most currencies were tied to gold or silver at a fixed rate ✤ So governments fixed the price of their currency ✤ Now, most major currencies are allowed to float freely in value against other currencies ✤ And, now, central banks fix the quantity of their currency ✤ In other words, the supply of moneyMonday, 18 March, 13
  21. 21. Monetary policy today ✤ Now, typically the domain of central banks, independent from government control ✤ Modern monetary policy focuses primarily on the supply of money ✤ Central banks influence interest rates businesses & individuals pay by changing the supply of money ✤ Interest rates are the “price” of borrowing money ✤ Central banks are increasingly using new methods like quantitative easing to manage money supplyMonday, 18 March, 13
  22. 22. Evolution of central banks ✤ The U.S. Federal Reserve was founded only in 1913 ✤ It became fully independent only in 1951 ✤ The Bank of England was created in the 17th Century ✤ It only became operationally independent in 1997Monday, 18 March, 13
  23. 23. Roles of central banks ✤ Lender of last resort to domestic banks (via “discount window”) ✤ Regulator of domestic banking system ✤ Sets benchmark (i.e. very short term) interest rate via open-market purchases of bonds ✤ Interest rates set to achieve steady economic growth with low inflation (price stability)Monday, 18 March, 13
  24. 24. Discount rate ✤ Central banks can lend directly to commercial banks, in their role as “lender of last resort” ✤ The central bank’s discount rate is the interest rate it charges commercial banks on overnight loans made through its discount window ✤ The discount rate is explicitly set by the central bankMonday, 18 March, 13
  25. 25. Examples of discount rates ✤ U.S. Fed discount rate (0.75%) ✤ HKMA base rate (0.5% or a half-percentage point above Fed Funds) ✤ Bank of Japan basic discount rate (0.3%) ✤ European Central Bank marginal lending facility rate (1.50%)Monday, 18 March, 13
  26. 26. Required reserve ratio ✤ Central banks are also typically responsible for overseeing the country’s banking system ✤ Central banks tell commercial banks the percentage of deposits to hold as reserves so they have enough cash on hand to pay depositors who want to withdraw their money ✤ The higher the reserve ratio, the less banks can lend out ✤ Currently 10% in U.S., 20.5% in China from Feb. 24Monday, 18 March, 13
  27. 27. Impact of reserve ratio adjustments Ratio UP borrowing DN Money supply DN ratio DN borrowing UP Money supply UPMonday, 18 March, 13
  28. 28. Open-market operations ✤ By offering to purchase government bonds from commercial banks, or offering to sell banks more bonds, a central bank can directly influence the supply of money in an economy ✤ As interest rates are in effect the price of borrowing money, the supply of money will have a direct – and immediate – impact on interest ratesMonday, 18 March, 13
  29. 29. Impact of open-market actions Open Mkt purchases UP Money supply UP interest rates DN Open Mkt sales UP Money supply DN interest rates UPMonday, 18 March, 13
  30. 30. Examples of key benchmark rates ✤ Fed Funds rate in U.S. (zero-0.25%) ✤ HKMA base rate (0.5% or a half-percentage point above Fed Funds) ✤ Overnight call rate in Japan (zero-0.10%) ✤ European Central Bank benchmark rate (0.75%)Monday, 18 March, 13
  31. 31. Quantitative Easing ✤ First used by the Bank of Japan from 2001 after a long period of near-zero short-term interest rates failed to kick-start the economy ✤ A central bank “expands its balance sheet” by offering to buy government or other bonds (assets) from commercial banks ✤ The central bank pays the commercial bank with new money ✤ In effect, it “prints” money to expand the money supplyMonday, 18 March, 13
  32. 32. With central banks, even no news is news! BOJ Leaves Overnight Call Rate At 0.0% To 0.1% Range By Tatsuo Ito and Takashi Nakamichi 7 March 2013 03:24 GMT (c) 2013 Dow Jones & Company, Inc. TOKYO--The Bank of Japan kept monetary policy on hold at its final policy board meeting under Gov. Masaaki Shirakawa, setting the stage for a change in leadership widely expected to adopt more aggressive easing measures. Thursdays decision comes amid some bright signs in the economy, and is in line with forecasts by 10 analysts polled by Dow Jones Newswires, who all said the BOJ would stand pat on policy to better examine the effects of its past easing steps. The board decided to maintain the size of the central banks asset-purchase program--its main tool for monetary easing-- at Y101 trillion by the end of the year and also voted unanimously to leave unchanged its policy rate, or the unsecured overnight call loan rate, in a 0.0%-0.1% range. One policy board member Sayuri Shirai proposed to immediately put into effect open-ended asset purchases scheduled to begin in 2014 and to consolidate them with purchases to facilitate money market operations. Another policy board member, Ryuzo Miyao, also proposed that the bank keep its policy rate at the current level around zero until its 2% inflation target is in sight. However, the proposals from Ms. Shirai and Mr. Miyao proposals were voted down 8-1. "The BOJ will pursue aggressive monetary easing through its virtually zero interest rate policy and asset purchases" to achieve its 2% price stability target, the central bank said in a statement released together with the announcement. Upgrading its monthly assessment, the BOJ said "Japans economy has stopped weakening." The central bank said last month that Japans economy appears to have stopped weakening.Monday, 18 March, 13
  33. 33. Everything central bankers say is news! ECB’s Nowotny Says It’s Not the Right Time to Cut Interest Rates By Stefan Riecher and Jonathan Tirone - Mar 14, 2013 European Central Bank Governing Council member Ewald Nowotny said it’s not the right time to reduce borrowing costs. “It isn’t the appropriate time to take interest-rate action,” Nowotny, who heads Austria’s central bank, said in Vienna today. “We’re working on the assumption that growth signs will improve over the course of the year.” While officials discussed cutting borrowing costs last week, the “prevailing consensus” was to leave the benchmark rate unchanged at a record low of 0.75 percent, ECB President Mario Draghi said on March 7. He expects the euro- area economy to “gradually recover” later this year. “We have an unsatisfactory growth in Europe,” Nowotny said today, adding that the Frankfurt-based ECB is “observing the situation.” The ECB last week cut its growth forecasts and now expects the 17-nation economy to shrink 0.5 percent this year before growing 1 percent in 2014. It sees inflation slowing to 1.3 percent next year, well below its 2 percent limit. Source: BloombergMonday, 18 March, 13
  34. 34. Fed funds rateMonday, 18 March, 13
  35. 35. U.S. inflationMonday, 18 March, 13