Friday, September 18, 2009

From recessions to recovery:Some notes (II)

The role of macroeconomic policy , is key to have a strong impact on the economic recovery . According to the IMF paper ,(WP/09/183, august 2009), a 1% of GDP increase in fiscal deficit imply a 0,12% increase in the post recession GDP rebound. On the other side, expansionary Monetary policy is also a powerful tool in industrial countries ,for economic recovery. In fact ,a 10% increase in the growth rate of real money stock , is associated with 0,35% increase in GDP growth. Adding up both effects, GDP growth in industrial economies , should start to reflect the impact of these recent expansionary fiscal and monetary policy.
Exchange rate policy is also relevant to define the recovery profile. Those countries with flexible exchange rate , experience a recovery growth more than a percentage point higher than those with fixed exchange rate .This was also the case after the Asian economic crisis in 1997.The flexible exchange rate ,allows for relative prices to adjust itself while the recession take place, such that while the non tradable sector fall the tradable sector expands , compensating for the decrease in domestic activity ,without making it further significant
Concerning structural policies, effective labor market rigidities( abiding by the enforcement of the labor law), have a negative effect on economy recovery, as long as it acts like a constraint to the adjustment between non tradable to tradable sectors goods , delaying the transfer from the unemployed to employed status, while the tradable sector creates new jobs opportunities.-
All of the previous notes, lead us to the following conclusion:
a.- Macroeconomic policies differences , influences the path of economic recovery among different countries. In the 2008 financial crisis, a decisive level of coordination which guided the implementation of both expansionary fiscal and monetary policy ,will make possible to have a low level of growth divergence between industrialized countries ,concerning the pace of recovery, although it is still plausible to have a “F” shaped recovery anyway. Some countries in Europe (Spain and Italy)are behind schedule for economic recovery.
b.- The mix between monetary and fiscal expansion, creates the challenges of the so called “exit strategy” ,which depend heavily upon monetary policy skills to avoid inflationary pressures, given the political nature of fiscal policy. However, as long as the fiscal expansion impact on growth is stronger and persistent, than the impact of expansionary monetary policy , it might be possible to neutralize the risk of the so called “W” shaped recovery(math in the first paragraph , seems to support this hypothesis).Therefore, while the monetary policy becomes more restrictive, the lasting impact of fiscal policy, might be a compensatory force keeping the momentum for economic growth .-
c.- Thus, the economic recovery which is already under way, it might turn out to be persistent although not homogeneously a strong one across the board, at least in the beginning of such a process, to get momentum later on (2010).