Macroeconomic management under the global financial crisis
description
Transcript of Macroeconomic management under the global financial crisis
Macroeconomic management under the global financial crisis
Bhanupong NidhiprabhaThammasat University
2
Fixed vs. managed flexible regimes
19481951
19541957
19601963
19661969
19721975
19781981
19841987
19901993
19961999
20022005
20080
5
10
15
20
25
30
35
40
45
50
Nominal price of the dollar
baht
Source: International Financial Statistics
3
EC:204 Economic Change in Thailand
• J.C. Ingram(1971) Economic Change in Thailand, 1850-1970
Stanford University Press• Stolper & Samuelson • P.F. Bell
4
Dates and magnitudes of devaluations
Dates Per centMay 1981 1.1July 1981 8.7November 1984 14.8December 1985 1.9July 2, 1997 Baht float
5
Cheaper dollar in the long run
19481953
19581963
19681973
19781983
19881993
19982003
20080
50
100
150
200
250
300
The baht price of the dollar
cpi (index)real dollar price (2005 price)
Baht
Source: International Financial Statistics
6
Important dates in September
• September 11, 2001• September 19, 2006: A turning point in Thailand’s
history• September 7, 2007. The US government seized
control of Fannie Mae and Freddie Mac• September 15, 2008: Lehman Brothers filed for
bankruptcy.• “Have history and precedent no bearing on
current financial crisis?”
7
The last remaining growth engine
19901992
19941996
19982000
20022004
20062008
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Exports-led growth
InvestmentExportsImports
Ratio
to G
DP
Source: Bank of Thailand
8
The long-run relationship
-40
-20
0
20
40
60
1994 1996 1998 2000 2002 2004 2006 2008
Exports ImportsSource: Bank of Thailand
9
Exchange rate volatility
-20
-10
0
10
20
90 92 94 96 98 00 02 04 06 08
% change y-o-y
Monthly Baht/USD exchange rate
Source: Bank of Thailand
10
60
70
80
90
100
110
120
130
00 01 02 03 04 05 06 07 08
baht dollar yen
Real Effective Exchange Rate Indexes(January 2000=100)
Loss of international competitiveness?
Source: International Financial Statistics
11
A policy faux pasDecember 18, 2006
Jan-05
Apr-05
Jul-05Oct-
05Jan
-06Apr-0
6Jul-0
6Oct-
06Jan
-07Apr-0
7Jul-0
7Oct-
07Jan
-0830
32
34
36
38
40
42
44
-2
0
2
4
6
8
10
12
Baht at different markets
onshoreoffshoreDifferentials (%)
Baht
/USD
Source: Bank of Thailand
12
International reserves
• Accountability • Transparency• Financial loss
13
Increasing fluctuations of long-term flowsWhy?
-3
-2
-1
0
1
2
3
4
5
1994 1996 1998 2000 2002 2004 2006 2008
FDI
Source: Bank of Thailand
14
Capital flows to the banking sector
-6
-4
-2
0
2
4
6
1994 1996 1998 2000 2002 2004 2006 2008
BANK
Source: Bank of Thailand
15
EC330: Economics of Money and Banking
• SS&W• ERTC: Impact of interest income taxes on bank
deposits
16
Dwindling short-term borrowing
-4
-3
-2
-1
0
1
2
3
4
5
1994 1996 1998 2000 2002 2004 2006 2008
OTHER
Source: Bank of Thailand
17
The yen-carry tradeThe breakdown of the interest parity condition
80
100
120
140
160
20
30
40
50
60
1994 1996 1998 2000 2002 2004 2006 2008
BAHT YEN
Source: International Financial Statistics
18
It started in 2002 in response toSeptember 11, 2001
0
2
4
6
8
10
12
14
1994 1996 1998 2000 2002 2004 2006 2008
BOT FED
Source: International Financial Statistics
19
Residential estate price-income ratio rising in tandem with increased debt-to-income ratio
UK USA Spain Sweeden Ireland Japan
93.9
23.4
67.362
86.1
-28.4
% change 1997-2007
20
• The housing price bubble burst in mid-2006 and both housing prices and housing starts began a long period of contraction.
• With declining home prices, borrowers were unable to refinance their loans and default rates soared.
• CDO and CDS are WMD
21
The collapse of housing prices March 2009(y-o-y)
Source: The Economist
22
Policy responses
• Fiscal policy stimulus• Easy monetary policy• Export expansion• Competitive exchange rate• Domestic consumption-led growth
23
-2
-1
0
1
2
3
1 2 3 4 5 6 7 8 9 10
FISCALEXPORTS
BOTRATEREER
CONS
Response of OUTPUT to various shocks
24
Results from A Vector Autoregressive Model
• Exports and domestic consumption contribute most to output growth.
• Exchange rate changes have relatively smaller impact on output when compared to changes in fiscal stimulus and key interest rates.
• Unlike fiscal expansion, monetary policy has longer lag but predictable impacts on output.
25
-12000
-8000
-4000
0
4000
8000
12000
1 2 3 4 5 6 7 8 9 10
Response of EXPORTS to FISCAL
-12000
-8000
-4000
0
4000
8000
12000
1 2 3 4 5 6 7 8 9 10
Response of EXPORTS to BOTRATE
-12000
-8000
-4000
0
4000
8000
12000
1 2 3 4 5 6 7 8 9 10
Response of EXPORTS to REER
-12000
-8000
-4000
0
4000
8000
12000
1 2 3 4 5 6 7 8 9 10
Response of EXPORTS to OUTPUT
Response to Cholesky One S.D. Innovations ± 2 S.E.
26
Impacts on exports of various shocks
• An appreciation of the real effective exchange rate results in a decline in exports.
• Exports depend on flexible and resilient output adjustments.
• Fiscal stimulus does not stimulate exports.• Tight monetary policy does not adversely
affect the export sector.
27
Lights at the end of the tunnel
• There are signs indicating a bottoming out of the 2009 recession.
• A mild recovery in 2010 is expected, provided that improved business sentiment remains.
28
Capital market and flows of hot money
-6
-4
-2
0
2
4
6
1994 1996 1998 2000 2002 2004 2006 2008
Portfolio
29
DJIANikk
ei
China (SSE
A)
India (BSE
)
Indonesia (JS
X)
Malaysia(KLSE
)
Singapore(ST
I)
South Korea(KOSP
I)
Taiwan (T
WI)
Thailand(SE
T)
8.8 15
61.6 68.5
93.1
3552.3 46.8
58.4 58.1
Stock Prices on September 9, 2009% Change on Dec 31, 2008
in USD terms
Source: The Economist
30
Conclusion
• Thailand’s exchange rate policy exhibits long-term consistency of market intervention.
• Output recovery depends on consumption rebound which requires regained consumer confidence.
• Exports are the remaining growth driver in Thailand; they are mainly determined by conditions in the world market rather than the weak currencies.
31
Concluding remarks
• Old habits die hard• Optimistic tendency of human behavior • Tendency to forget the lessons of the past• There will be other banking crises.
32
Time is a great teacher, but unfortunately it kills all its pupils.
Berlioz, Hector (1803-1869)
33
The best teachers taught us to give our best.