Lecture 8-Policy Framework Scenario_2015

Lecture 8-Policy Framework Scenario_2015 - Macroeconomic...

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Macroeconomic Policy Analysis in Low Income Countries Lectures 8: Policy Framework By Dr. Mark Ellyne
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Goals of the Lecture Review process of creating a no-policy- change scenario that is consistent across sectors Understand different policy frameworks between fixed and floating exchange rates Be familiar with some policy strategies for certain common shocks Dr. M Ellyne – Macro Policy Analysis 2
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No-Policy-Change Scenario Incorporate all known information, including future resource developments Assume no change in the RER in the future (i.e. PPP holds from last data period) Incorporate assumptions for rest of the world from IMF WEO (e.g. Oil price, GDP growth of industrial countries, ...) Dr. M Ellyne – Macro Policy Analysis 3
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Review Key Issues for the Medium Term Growth and Inflation Fiscal deficit Current account deficit and absorption Competitiveness/real exchange rate Public Debt Dr. M Ellyne – Macro Policy Analysis 4
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Real Sector Issues What sectors are producing the growth? Contributions to GDP Growth from primary, secondary and tertiary sectors; or from C, I, X and M. = ++ Dr. M Ellyne – Macro Policy Analysis 5
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Real Sector Issues What is happening to consumption per capita (C$/pop ) Investment/GDP ratio should be consistent with ICOR Is inflation projection consistent with money growth? %∆P = %∆M+%∆v-%∆Q Dr. M Ellyne – Macro Policy Analysis 6
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BoP - Current Account Issues Does the CAB/GDP make sense in terms of S-I? Who is saving, who is investing? i.e., government or private sector. CAB/GDP= Fisc Bal/GDP + Pvt Bal/GDP Can import demand be realized? Is import propensity/elasticity high? Where are the inflows coming from? Dr. M Ellyne – Macro Policy Analysis 7
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BOP – Capital Account Issues What is happening to foreign reserves? Does it have any implication for the real exchange rate sustainability? What’s happening to FDI Is official foreign borrowing consistent with government borrowing? Dr. M Ellyne – Macro Policy Analysis 8
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Fiscal Projections Issues What is driving the Deficit/GDP? Revenue or expenditure? How does the revenue/GDP ratio compare with other countries? What elements of government revenue are strongest and weakest? Are public sector wages high or growing excessively? Dr. M Ellyne – Macro Policy Analysis 9
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Debt Is internal or external debt growing too fast or at dangerous levels? Is the domestic interest cost a problem? Dr. M Ellyne – Macro Policy Analysis 10
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External Debt Consistency Checks Remember that: Foreign financed Investment Spending ≈ Foreign Grants + loan disbursements, and must be shown in BOP Foreign Debt t+1 = Debt t – Amortization t + new disbursements t Dr. M Ellyne – Macro Policy Analysis 11
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Monetary Policy What is the monetary policy? (monetary targeting, inflation target, fixed exchange rate?) How do the sectoral demands for money compare to the QTM approach? What do the divergences mean?
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