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81. The Curious Case of GDP Growth

Author:
Rajiv Kumar and Geetima Das Krishna
Publication Date:
05-2015
Content Type:
Special Report
Institution:
Centre for Policy Research, India
Abstract:
The Central Statistics Office (CSO), the custodian of Indian statistics, has faced a lot of questioning after the release of the new GDP series with 2011-12 as base. The RBI, Ministry of Finance, IMF, several credit rating agencies have all questioned the validity of the revisions. Some analysts like Ruchir Sharma of Morgan Stanley have gone as far as to assert that these revisions if not corrected will make Indian statics as suspect as Chinese GDP data in the past. This will be a real pity. The extent of the revisions is shown in Table 1 below. With the new base year of 2012-13, GDP growth in FY 14 (2013-14) has been revised upwards to 6.6% at factor cost and a whopping 6.9% at market prices. This represents about 2% increase in GDP growth over the earlier estimate of 5%. Surely, such a large scale revision will or should significantly affect the understanding of the underlying economic phenomenon and lead to a marked policy shift. Contrary to what Surjit S Bhalla (SSB) would have us believe, not even the government is taking the revised estimates seriously enough as reflected in a lack of any change in policy direction.
Topic:
Political Economy, GDP, Economy, and Economic Growth
Political Geography:
South Asia and India

82. On the Desirability of Nominal GDP Targeting

Author:
Julio Garin, Robert Lester, and Eric Sims
Publication Date:
08-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
Topic:
Economics, Human Welfare, Markets, and GDP
Political Geography:
Global Focus

83. Estimates of Fundamental Equilibrium Exchange Rates, November 2015

Author:
William R. Cline
Publication Date:
11-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
The latest semiannual fundamental equilibrium exchange rate (FEER) estimates find that the US dollar is now overvalued by about 10 percent, comparable to levels in 2008 through early 2010 and again in 2011. Unlike then, the current strong dollar does not reflect a weak renminbi kept undervalued by major exchange rate intervention by China. Instead, China's current account surplus has fallen sharply relative to GDP, and its recent intervention has been to prevent excessive depreciation rather than to prevent appreciation. Additionally, declines in the real effective exchange rates (REERs) for major emerging-market economies and resource-based advanced economies, driven by falling commodity prices in recent months, have strengthened the dollar. Recent increases in the REERs for the euro area and Japan have removed their modest undervaluation identified in the last FEERs estimates in May, and the Chinese renminbi remains consistent with its FEER. The dollar's rise by nearly 15 percent in real effective terms over the past two years could impose a drag of nearly one-half percent annually on US demand growth over the next five years. As the Federal Reserve moves to normalize US monetary policy, it may need to consider a gentler rise in interest rates than it might otherwise have pursued, both to temper possible further strengthening of the dollar in response to higher interest rates and to help offset the demand compression from falling net export
Topic:
Economics, International Trade and Finance, Monetary Policy, and GDP
Political Geography:
United States and China

84. Stability Bonds for the Euro Area

Author:
Angel Ubide
Publication Date:
12-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
The rules and buffers created in the last few years to enable the euro area to withstand another sudden stop of credit and market-driven panic in one or more of its member states are welcome steps, but they are widely recognized as inadequate. Ubide proposes creating a system of stability bonds in the euro area, to be issued by a new European Debt Agency, to partially finance the debt of euro area countries—up to 25 percent of GDP. These stability bonds should be initially backed by tax revenues transferred from national treasuries, but ultimately by the creation of euro area–wide tax revenues, and used to fund the operations of national governments. They could also be used for euro area–wide fiscal stimulus, to complement the fiscal policies of member states. Such bonds would strengthen the euro area economic infrastructure, creating incentives for countries to reduce their deficits but not forcing them to do so when such actions would drive their economies further into a downturn. The bonds would permit the euro area to adopt a more flexible or expansionary fiscal policy during recessions.
Topic:
Economics, International Trade and Finance, Monetary Policy, and GDP
Political Geography:
Europe

85. Inflation and Activity: Two Explorations and Their Monetary Policy Implications

Author:
Olivier Blanchard, Eugenio Cerutti, and Lawrence H. Summers
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Blanchard, Cerutti, and Summers explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the prerecession trend, suggesting hysteresis. The authors look at 122 recessions over the past 50 years in 23 countries and find that a high proportion of them have been followed by lower output or even lower growth. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. The authors estimate a Phillips curve relation over the past 50 years for 20 countries and find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. The paper concludes with implications for monetary policy.
Topic:
Economics, Labor Issues, Monetary Policy, Financial Crisis, and GDP
Political Geography:
Global Focus

86. Further Statistical Debate on "Too Much Finance"

Author:
William R. Cline
Publication Date:
10-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Cline critiques OECD findings on "too much finance," which seem to imply that the optimal amount of credit in an economy is zero, given the linear specification of the main tests. If these results were taken literally, there would be a radical policy implication: Growth would be maximized by completely eliminating credit finance. He then finds that the negative impact of additional finance on growth is reversed when the appropriate (purchasing-power-parity) per capita income is applied and country fixed effects are removed. Separate tests for countries with intermediated finance below and above 60 percent of GDP show a significant positive effect of finance on growth in the lower group but an insignificant effect in the higher group. He also responds to critics of his earlier study.
Topic:
Economics, International Political Economy, International Trade and Finance, and GDP
Political Geography:
Global Focus

87. News shocks in the data: Olympic Games and their macroeconomic effects – Reply

Author:
Viktoria Langer, Wolfgang Maennig, and Felix J. Richter
Publication Date:
10-2015
Content Type:
Working Paper
Institution:
Chair for Economic Policy, University of Hamburg
Abstract:
Recent analyses relate increases in the growth rate of countries to anticipation effects caused by bidding for the Olympic Games, so called news shocks. We argue that these findings should be interpreted cautiously. First, these analyses may suffer from an omitted variable bias because they neglect key determinants of economic growth. Second, these analyses compare the bidders for the Olympic Games to all other countries in the world, which constitutes a comparison between groups that show large differences in their structural characteristics. We show that including established determinants of economic growth and comparing the bidders to a suitable control group may lead to a complete disappearance of the anticipated economic effects of Olympic Games.
Topic:
GDP, Sports, Economic Growth, Olympics, and Macroeconomics
Political Geography:
Global Focus