Where danger lurks
Olivier Blanchard 03 October 2014
Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.
Until the 2008 global financial crisis, mainstream US macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment.
The benign view reflected both factors internal to economics and an external economic environment that for years seemed indeed increasingly benign.
Macroeconomic policy Monetary policy
macroeconomics, global crisis, great moderation, rational expectations, nonlinearities, fluctuations, business cycle, monetary policy, inflation, bank runs, deposit insurance, sudden stops, capital flows, liquidity, maturity mismatch, zero lower bound, liquidity trap, capital requirements, credit constraints, precautionary savings, housing boom, Credit crunch, unconventional monetary policy, fiscal policy, sovereign default, diabolical loop, deflation, debt deflation, financial regulation, regulatory arbitrage, DSGE models
The role of corporate saving in global rebalancing
Philippe Bacchetta, Kenza Benhima 24 August 2014
Among the various explanations behind global imbalances, the role of corporate saving has received relatively little attention. This column argues that corporate saving is quantitatively relevant, and proposes a theory that is consistent with the stylised facts and useful for understanding the current phase of global rebalancing. The theory implies that, while the economic contraction originating in developed countries has pushed interest rates towards the zero lower bound, the recent growth slowdown in emerging countries could push them out of it.
The increase in global imbalances in the last decade posed a theoretical challenge for international macroeconomics. Why did some less-developed countries with a higher need for capital, like China, lend to richer countries? The inconsistency of standard open-economy dynamic models with actual global capital flows had already been stressed before (e.g. by Lucas 1990), but the sensitivity to this issue became more acute with increasing global imbalances. This stimulated the development of several alternative theoretical frameworks.
International finance International trade
interest rates, global imbalances, capital flows, saving, global crisis, credit constraints, savings glut, zero lower bound, corporate saving, global rebalancing
When microentrepreneurs reinvest: The role of formal and informal saving
Thorsten Beck, Haki Pamuk, Burak Uras 21 April 2014
A recent literature shows that access to formal savings devices improves entrepreneurial outcomes in developing economies. This column presents research comparing the effect of saving in formal accounts with alternative, less formal measures. Findings suggest that entrepreneurs use formal saving to insulate themselves from household consumption commitments.
In developing countries, intermediation costs and enforcement frictions constrain access to external finance for micro and small enterprises, leaving entrepreneurs' earning retention as a key source of funds for small business growth. But what explains entrepreneurial decisions to reinvest in their own businesses? This column reports on recent research using an MSE survey for over 6,000 entrepreneurs undertaken in Tanzania in 2010.
credit constraints, microentrepreneurs, informal saving
Fiscal adjustment and growth: Beware of the credit constraints
Emanuele Baldacci, Sanjeev Gupta, Carlos Mulas-Granados 31 March 2014
The recent debate on the link between austerity and growth has focused on the short run. This column discusses recent research into the link between fiscal consolidation and medium-term growth under different financial conditions. If credit is not available to consumers and investors, private demand is less able to compensate for cutbacks in public demand, so large spending cuts can have a negative effect on growth. Difficult financial conditions probably explain why fiscal adjustments that worked in the 1990s have not produced similar beneficial effects on growth in recent years.
In the aftermath of the recent financial crisis, the discussion of the effects of fiscal adjustment on economic growth has intensified. While some scholars have focused on the characteristics of the fiscal consolidation needed to bring public debt down from historically high levels, others have examined the effects of alternative strategies on economic performance. The VoxEU debate aptly covered in “Has Austerity Gone Too Far?” (Corsetti 2012) sums up the conflicting positions.
Financial markets Macroeconomic policy
financial crisis, fiscal policy, deleveraging, fiscal consolidation, debt, credit constraints, austerity
Consumption and credit constraints during financial crises
Petra Gerlach-Kristen, Rossana Merola, Conor O'Toole 01 December 2013
Households tend to smooth their consumption and that’s why expenditures do not display a large variability over time. However, the recent financial crisis has been associated with a large decrease in consumption in certain countries. This column presents evidence that a drop in income during a crisis leads to a lower short-run consumption. Furthermore, micro data analysis shows that some households are affected more than others. Thus, policy recommendations can be made only after taking household heterogeneity into account.
In most countries, households’ consumption expenditure accounts for more than half of GDP. How much households spend reflects their living standards, and typically households try to smooth consumption over time. As a result, consumption usually does not display large variability and, therefore, has found comparatively little academic and policy attention.
Since the onset of the financial crisis, consumption has dropped markedly in many countries. Figure 1 shows the development of per capita real consumption in the main European crisis countries.
financial crises, consumption, credit constraints
How to get around credit constraints? The role of renting and leasing during financial crises
Peter N. Gal, Gabor Pinter 21 September 2013
Renting capital goods makes up 20% of total capital expenses by US companies and this type of capital spending increases in downturns. This column discusses research showing that the systematic pattern of corporate leasing can be linked to credit constraints. This means that a robust rental sector has the potential to mitigate the negative effects of financial disruptions when obtaining credit becomes difficult.
How does the ownership of capital affect the aggregate behaviour of the economy? Does it matter whether firms own or rent production capital such as machinery, equipment, offices, and structures? This question has been somewhat neglected by macroeconomists, mainly because in a frictionless world the question of capital ownership is irrelevant – firms are indifferent between renting and owning (Jorgenson 1963).
financial crises, investment, business cycles, credit constraints, rental markets
Who gets the credit? And does it matter? Household vs. firm lending across countries
Thorsten Beck, Berrak Buyukkarabacak, Felix Rioja, Neven Valev 09 July 2009
How does financial development affect macroeconomic outcomes? Previous studies have relied on aggregate measures. This column introduces a data set that distinguishes between lending to enterprises and households and investigates the consequences for economic growth, income inequality, and consumption smoothing.
An extensive literature has documented the positive effect of financial development on economic growth and poverty reduction (Rajan and Zingales 1998; Beck, Levine and Loayza, 2000; Beck, Demirguc-Kunt and Levine, 2007).
Development Financial markets
financial development, household credit, enterprise credit, lending, credit constraints