Global Economic Issues Carmen M. Reinhart Harvard University - - PowerPoint PPT Presentation

Carmen M. Reinhart

Harvard University

Economic Advisory Panel Meetings Federal Reserve Bank of New York, May 15, 2015

Global Economic Issues

Reinhart 1

 Europe: (i) Delayed recovery, (ii)

deflationary tendencies (iii) Debt overhangs and their resolution (iv) Greece?

 Global finance: Equilibrium real interest

rates, QE in Europe and Japan, financial repression?

 Emerging markets: (i) Capital flow

bonanzas and their aftermath (ii) Where are we in the boom-bust cycle? (iii) persistence and duration--Commodities? China?

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The 2007-2009 Crisis: Severity measures

 It is premature to construct a definitive

measure of the severity of the recent crises

 Of the twelve countries experiencing a

systemic crisis starting in 2007-2008 (France, Germany, Greece, Iceland, Ireland, Italy, Netherlands, Portugal, Spain, Ukraine, UK, and US), only Germany and the US have reached their pre-crisis peak in per capita GDP.

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Output, Crises and Recovery

Reinhart and Rogoff (2014) updated with World Economic Outlook, April 2015

12 Systemic banking crises, 2007-2008 % change Peak to Peak to Peak to Severity Breakeven Year Country trough trough recovery index year 1 2008 France

• 3.8

2 9 12.8 2016 2 2008 Germany

• 5.3

1 3 8.3 2011 3 2008 Greece

• 25.8

6 14 39.8 2021?? 4 2007 Iceland

• 9.9

3 9 18.9 2016 5 2007 Ireland

• 12.6

3 11 23.6 2018 6 2008 Italy

• 10.8

7 14 24.8 2021?? 7 2008 Netherlands

• 5.0

5 10 15.0 2018 8 2008 Portugal

• 7.4

6 12 19.4 2019 9 2008 Spain

• 9.0

6 11 20.0 2018 10 2008 Ukraine

• 14.8

1 12 26.8 2020 11 2007 United Kingdom

• 5.9

5 8 13.9 2015 12 2007 United States

• 4.8

2 6 10.8 2013 Summary: Mean

• 9.6

3.9 9.9 19.5 Median

• 8.2

4.0 10.5 19.2 Standard deviation 6.1 2.2 3.2 8.6 Note: The italics denote any calculations in which IMF estimates for 2015-2020 are used. Number of years

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 The number of years to recover the pre-

crisis peak in per capita GDP in 100 of the worst crises since the 1840s is about 8 years (the median is 6 1/2 years).

 In the 2007-2008 wave of crises, the average

may come in closer to 10 years.

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The incidence of deflation and high inflation, 22 advanced economies, 1945-2015

10 20 30 40 50 60 70 80 90 100 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Share with annual inflation above 10% Share with deflation

Iceland 2008-2009 Japan

Share of countries

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What factors have made this crisis so protracted? What is the end-game?

The list includes:

 the synchronous nature of the crisis,  the absence of greater exchange rate adjustment,  austerity,  the dearth of credit—(external or domestic),  the lack of deleveraging and write-downs (private or

public) almost a decade later.

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Private Domestic Credit as a Percent of GDP Advanced Economies, 1950-2014

8

40 60 80 100 120 140 160 180 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Lack of deleveraging (even after 7 years) 8 Reinhart

Gross Total (Public plus Private) External Debt as a Percent of GDP: 22 Advanced Economies, 1970-2014

9

50 100 150 200 250 300 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Average 22 Advanced Economies

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Reinhart Reinhart

Public debt as a percent of GDP: Advanced Economies: 1900-2015

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Reinhart

What is the endgame?

Throughout history, debt/GDP ratios have been reduced by: (i) economic growth; (ii) fiscal adjustment/austerity; (iii) explicit default or restructuring; (iv) a sudden surprise burst in inflation; and (v) a steady dosage of financial repression that is accompanied by an equally steady dosage of inflation.

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Official debt is the Greek story now

Arslanalp and Tsuda, (2014)

20 40 60 80 100 120 140 160 180 200 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Percent of GDP Percent of total

Greece

1xxx.

100 0% 100% 2004 2005 2006 2007 2008 2009 2010 2011 2012 Percent

• f GDP

Percent

• f total

Domestic central bank Domestic bank Domestic nonbank Foreign official sector Foreign bank Foreign nonbank Total debt (rhs)

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"World" Real Short-term Interest Rates, 1870-2015

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Reinhart

Real T-bill Rates Frequency Distributions: 22 Advanced Economies, 1945-2015

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1945-1979 1980-2007 2008-2015

• 1 percent
• 33.9
• 5.7
• 28.8
• 47.8
• 11.3
• 57.7

1 percent

• 62.8
• 23.1
• 85.9

2 percent

• 76.5
• 38.8
• 95.5

Real Interest rate on T-bills Share of obsevations at or below: 5 10 15 20 25 30 35

• 10
• 9
• 8
• 7
• 6
• 5
• 4
• 3
• 2
• 1

1 2 3 4 5 6 7 8 9 10 real interest rate on 3-month T-bills (percent) 1946-1979 1980-2007 2008-2015 Percent of

• bservations

The cross-country incidence of negative real interest rates in advanced economies

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(left scale, tan bars) (right scale, red bars) Share of Number of countries with countries with negative real rates negative real rates

2 4 6 8 10 12 14 16 10 20 30 40 50 60 70 80 90 100 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Rates are on 3-month T-bills 22 advanced economies, 1945-2015

Crisis probabilities and the capital flow cycle Reinhart and Reinhart (2015)

Probability of a crisis, by type, and the benefit of observing a current account bonanza

Share of countries, 1982 to 2014, percent

Shaded bars are statistically significant.

Emerging market Advanced

Source: Reinhart and Reinhart (2009) and Reinhart (2010), updated.

0% 10% 20% 30% 40% Banking External default Domestic default Inflation crisis Currency 0% 10% 20% 30% 40% Unconditional Conditional

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By early 2013, in major emerging markets

 Current account deficits had reappeared  As did credit booms  And currency overvaluation  Growth had begun to slow  Inflation had resurfaced as a concern

And then came the announcement of QE tapering…

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Real Commodity Prices: 1854-2015

0.7 1.2 1.7 2.2 2.7 3.2 3.7 4.2 1854 1864 1874 1884 1894 1904 1914 1924 1934 1944 1954 1964 1974 1984 1994 2004 2014

Real commodity prices index (2005 = 1) Boughton (1991) 1854-1979 IMF WEO, 1980-2015, Non-Fuel Price Index deflated by Advanced Economy CPI

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The share of EMs with significant current account deficits has risen markedly

35 40 45 50 55 60 65 70 75 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Percent

Share of emerging market and developing countries with a current account deficit greater than 3 percent of GDP (2-year moving average) Debt crisis

The Asian and Russian crises Global financial crisis

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China’s fall and rise, 1500-2013

Reinhart

5 10 15 20 25 30 35

150017001870196119631965196719691971197319751977197919811983198519871989199119931995199719992001200320052007200920112013

Percent

China's share in world real GDP 1500-2013

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