[PPT] - New Zealands External Imbalances and Macroeconomic Policy New PowerPoint Presentation

SLIDE 1

New Zealand’s External Imbalances and Macroeconomic Policy

New Zealand’s Macroeconomic Imbalances - Causes and Remedies Philip R. Lane, Trinity College Dublin June 23/24 2011

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 1 / 27

SLIDE 2

Introduction

External imbalances a long-term feature of New Zealand’s macroeconomic pro…le Global Financial Crisis

Impact harshest on large-de…cit countries But NZ performed relatively well

Europe, G20:

Push to limit external imbalances

New Zealand:

Should policymakers do more to address external imbalances?

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 2 / 27

SLIDE 3

New Zealand’s External Position

Flow: current account de…cit Stock: net international investment position International balance sheet: level and composition of foreign assets and foreign liabilities

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 3 / 27

SLIDE 4

New Zealand’s Current Account Balance

15
10
5

5 Percent 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Year

Current Account to GDP

Figure: Current Account Ratio, 1970 to 2010. Source: IMF.

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 4 / 27

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New Zealand’s Net International Investment Position

120
100
80
60
40
20

Percent 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Year

Net Foreign Assets to GDP

Figure: Net Foreign Asset Position. Note: Expressed as a ratio to GDP. Source: Update on dataset reported in Lane and Milesi-Ferretti (2007).

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 5 / 27

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Major Debtor Nations

Table: Major International Debtors, End 2009

NFA/GDP Hungary

128

Portugal

120

Bulgaria

109

Ireland

102

New Zealand

97

Spain

95

Greece

89

Latvia

87

Estonia

84

Slovak Republic

73

Note: Net foreign asset positions, based on updated version of Lane and Milesi-Ferretti (2007). Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 6 / 27

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Comparative Dynamics

Table: Evolution of Net Foreign Asset Positions

2002 2007 2010 New Zealand

84
87
87

Euro Periphery

48
77
101

Emerging Latin America

47
24
21

Emerging Asia

15

16 Emerging Europe

35
65
73

Note: Net foreign asset positions, based on updated version of Lane and Milesi-Ferretti (2007). Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 7 / 27

SLIDE 8

Net Foreign Debt and Net Foreign Equity

60
40
20

Percent 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Year Net Equity Net Debt

Net Equity and Net Debt to GDP

Figure: Net Foreign Equity and Net Foreign Debt Positions.Source: Update on dataset reported in Lane and Milesi-Ferretti (2007).

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 8 / 27

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Net Foreign Debt and Net Foreign Equity

Table: Net Foreign Debt and Net Foreign Equity Positions

Net Debt Net Equity 2002 2007 2010 2002 2007 2010 New Zealand

55
60
63
28
27
23

Euro Periphery

39
69
91
19
26
11

Emerging Latin America

23

3 4

24
27
25

Emerging Asia 27 36

14
27
19

Emerging Europe

2
18
25
34
47
47

Note: This table reports net external debt (international debt assets plus foreign exchange reserves minus international debt liabilities) and net foreign equity (portfolio equity assets plus FDI assets minus sum of portfolio equity liabilities and FDI liabilities), expressed as percentages of GDP. Source: Updated version of dataset reported by Lane and Milesi-Ferretti (2007). Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 9 / 27

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International Financial Integration

50 100 150 200 250 Percent 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Year

International Financial Integration Ratio to GDP

Figure: International Financial Integration Ratio. Source: Update on dataset reported in Lane and Milesi-Ferretti (2007).

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 10 / 27

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Risk Assessment

Table: Gross Foreign Debt and O¢cial Reserve Assets

Gross Debt Foreign Exchange Reserves 2002 2007 2010 2002 2007 2010 New Zealand 91 91 96 8 13 12 Euro Periphery 184 315 367 6 1 Emerging Latin America 61 34 28 10 13 14 Emerging Asia 46 37 33 29 36 43 Emerging Europe 46 71 84 21 20 20 Note: This table reports gross external debt (international portfolio and other debt liabilities) and o¢cial reserve assets, expressed as percentages of GDP. Source: Updated version of dataset reported by Lane and Milesi-Ferretti (2007). Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 11 / 27

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International Financial Integration

Table: International Financial Integration

2002 2007 2009 New Zealand 227 227 253 Euro Periphery 593 927 1063 Emerging Latin America 142 126 133 Emerging Asia 133 182 192 Emerging Europe 132 214 244 Source: Updated version of dataset reported by Lane and Milesi-Ferretti (2007). Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 12 / 27

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International Balance Sheet

Table: International Balance Sheet

2002 2007 2010 Assets Portfolio Equity 15 21 21 FDI 15 12 13 O¢cial Reserves 8 13 12 Portfolio Debt 9 6 8 Other Debt 18 12 12 Liabilities Portfolio Equity 9 10 7 FDI 49 51 50 Portfolio Debt 46 45 46 Other Debt 44 47 50 Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 13 / 27

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Domestic Credit

Table: Private Domestic Credit

2002 2007 2009 New Zealand 109 140 153 Euro Periphery 99 149 181 Emerging Latin America 30 33 44 Emerging Asia 78 60 53 Emerging Europe 28 54 75 Note: This table reports private credit by deposit money banks and other …nancial institutions as a percentage of GDP. Source: Beck et al (2009). Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 14 / 27

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Risk Assessment

‘Test’ of global …nancial crisis

Monetary expansion, currency depreciation Fiscal activism (large swing in …scal balance) NZ not a target

But two outstanding problems

Growth performance Risk of future crises

Macro externalities: “overborrowing” syndrome

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 15 / 27

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External De…cits and Growth Performance

Current Account De…cit squeezes export sector

Exporting and productivity growth “Learning by doing” Financial frictions and sectoral growth

Volatility in sectoral employment External debt and real interest rate

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 16 / 27

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External Debt and Real Interest Rate

United States United Kingdom Austria Belgium Denmark FranceGermany Italy Netherlands Norway Sweden Switzerland Canada Japan Finland Greece Portugal Spain Australia New Zealand Chile Czech Republic Slovak Republic Hungary Poland

1 2 3 4 Real Long Run Interest Rate

50

50 100 150 Net Debt to GDP

Figure: Scatter of Real Interest Rate Against Net External Debt. Source: OECD for interest rates and in‡ation. Source: Update on dataset reported in Lane and Milesi-Ferretti (2007).

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 17 / 27

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External Imbalances and Crisis Risk

Sudden stop in net ‡ows Sudden stop in debt rollover Large output and expenditure declines during sudden stops Asset price decline; …nancial stability risks Evidence from external adjustment during global …nancial crisis (Lane and Milesi-Ferretti 2011a, 2011b)

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 18 / 27

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Crisis Risk and New Zealand

High external debt

FX risk hedged Foreign-owned banks

Reversal in house/farm prices “Asia” shock and impact on AUS/NZ? Global re-assessment of debt limits

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 19 / 27

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External Imbalances and Macroeconomic Policy Framework I

Monetary Policy

In‡ation targeting regime appropriate Interest rate instrument too blunt to target external balance or asset prices Stabilising role of activist policy during crises Sterilised currency interventions?

Macro-Prudential Regulation

Central role of banks in cross-border …nance Limitation: direct cross-border borrowing by non-banks

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 20 / 27

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External Imbalances and Macroeconomic Policy Framework II

Structural Policies

Pro-Growth Policies Pro-export policies Shock Absorbers Labour market Financial system Legal system Financial Development (Inward equity investment) International …nancial insurance Swap lines Credit lines Stabilisation fund Foreign-exchange reserves

Fiscal Policy

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 21 / 27

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External Imbalances and Fiscal Policy

preventive role in targeting external imbalances …scal policy and external adjustment …scal policy and crisis management making …scal policy e¤ective formal …scal framework

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 22 / 27

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Fiscal Policy and External Imbalances

Prevention/Correction

“Danger Zone”

Temporary/permanent shifts in government consumption GN, GT and relative price of nontradables Microeconomic interventions

Time-varying tax rates

Fiscal balance and external balance (‡ows; stocks)

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 23 / 27

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Fiscal Policy and Crisis Management

Strong …scal position limits “negative feedback loops” Fiscal activism limits macroeconomic costs of crises Empirically, …nancial crises carry …scal costs

Direct: bailout costs (policy choices) Explicit Implicit Indirect: Weak growth

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 24 / 27

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Making Fiscal Policy E¤ective

Fiscal sustainability critically important

Low public debt ratio Correction mechanism to avoid “drift”

Framework to avoid pro-cyclicality and enable counter-cyclicality Identi…cation and implementation lags Diagnostics of structural balance

Financial cycle and …scal cycle Terms of trade shocks

“Leaning against the wind”

GDP cycle external and domestic …nancial imbalances

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 25 / 27

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Fiscal Framework

Fiscal rules

“Safe” target for public debt ratio Avoid …scal procyclicality GDP cycle; …nancial cycle; TT cycle

Independent …scal council

Monitoring of rules Promote rigorous debate on macroeconomic and …nancial risks Avoid “small country syndrome”

Political “buy in” essential

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 26 / 27

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Conclusions

Scale of external imbalances problematic

Chronic - export squeeze and growth Acute - risk of future crisis

“Risk management” perspective on macroeconomic policy

Low-probability but high-cost scenarios

Emphasis here on …scal policy

Philip R. Lane, Trinity College Dublin () New Zealand’s External Imbalances and Macroeconomic Policy June 23/24 2011 27 / 27