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This Working Paper series presents papers in a preliminary form and serves to
stimulatecommentanddiscussion.Theviewsexpressedinthispaperareentirelythe
authors ownandnotthose oftheLowyInstituteforInternationalPolicy.
TheGlobalFinancialCrisis:CausesandConsequences*
WarwickJ.McKibbin**
CAMA,AustralianNationalUniversity &
TheBrookingsInstitution
AndrewStoeckel
VisitingFellow,CAMA
AustralianNationalUniversity
RevisedSeptember2009
JELClassifications:.
Keywords:GlobalFinancialCrisis,InternationalTrade,DSGEmodels.
TheGlobalFinancialCrisis:CausesandConsequences
Abstract
Thispapermodelstheglobalfinancialcrisisasacombinationofshockstoglobalhousing
marketsandsharpincreasesinriskpremiaoffirms,householdsandinternationalinvestorsin
anintertemporal(orDSGE)globalmodel.Themodelhassixsectorsofproductionandtrade
in15majoreconomiesandregions.Thepapershowsthattheshocksobservedinfinancial
marketscanbeusedtogeneratethesevereeconomiccontractioninglobaltradeand
productioncurrentlybeingexperiencedin2009.Inparticularthedistinctionbetweenthe
productionandtradeofdurableandnondurablegoodsplaysakey roleinexplainingthe
muchlargercontractionintradethanGDPexperiencedbymosteconomies.
Theresultsshowthatthefutureoftheglobaleconomydependscriticallyonwhetherthe
shockstoriskareexpectedtobepermanentortemporary.
WarwickMcKibbin
CentreforAppliedMacroeconomicAnalysis
CollegeofBusinessandEconomics
AustralianNationalUniversity
&TheBrookingsInstitution
Washington DC
AndrewStoeckel
CentreforAppliedMacroeconomicAnalysis
CollegeofBusinessandEconomics
AustralianNationalUniversity
1
1.Introduction
ThecollapseofLehmanBrothersinSeptember2008,sentawaveoffeararoundworld
financialmarkets.Banksvirtuallystoppedlendingtoeachother.Theriskpremiumon
interbankborrowingrosesharply to5percent,whereastypicallyitwasclosetozero.
Althoughauthoritiesscrambledtoinjectliquidityintofinancialmarkets,thedamagewas
done.Theriskpremiumoncorporatebondsshotupevenmoretoover6percent.Large
CAPEXprojectswereshelved,thecorporatesectorvirtuallystoppedborrowing,tradecredit
washardtogetand,withfallingdemand,particularlyforinvestmentgoodsand
manufacturingdurableslikecars,tradevolumescollapsed.
Theresultisthattheglobalfinancialcrisishasseenthelargestandsharpestdropinglobal
economicactivityofthemodernera.In2009,mostmajordevelopedeconomiesfind
themselvesinadeeprecession.Thefalloutforglobaltrade,bothforvolumesandthepattern
of tradehasbeendramatic. TheOECDpredictsworldtradevolumescouldshrinkby13
percentin2009from2008levels.1
Governmentshaverespondedwithaneasingofmonetaryandfiscalpolicythatinturnhave
theirowneffectsonactivityandfinancialandtradeflows.Thedownturninactivityis
causingunemploymenttorisesharplyand,withit,apoliticalresponsetoprotectdomestic
industriesthroughvariouscombinationsofdomesticsubsidiesandborderprotection.Thereis
potentialforprotectionism torisefurther.
Theobjectiveofthispaperistwofold:tomodeltheglobalfinancialcrisisandexplorethe
differencesbetweenasharpriseinglobalriskthatispermanentversusonethatexpectedto
betemporary andsecond,toshowtheimpactofthepolicyresponse,especiallythefiscal
response.Todothis,adynamic,intertemporal generalequilibriummodelthatfullyintegrates
thefinancialandrealsectorsoftheeconomyisusedtounravelandunderstandthe
mechanismsatwork.Themodelincorporateswealtheffects,expectationsandfinancial
marketsforbonds,equitiesandforeignexchangeaswellastradeandfinancialflows.Itisa
suitabletooltoanalysetheimpactofthecrisisandpolicyresponsesonglobaltradeand
financialflows.
Thepaperisorganisedasfollows.Inthenextsection,themainfeaturesoftheGCubed
model thatisusedinthisanalysisaredescribedbrieflyasthemodel isdocumentedinfull
elsewhere.
Insection3, thesimulationstorepresentthefinancialcrisisaredescribedandthejustification
forthesizeoftheshockschosen.Itturnsoutfiveshocksareneeded:threeforthecrisisitself
andtwoforthesubsequentpolicyresponseswhichcoversmonetaryandfiscal stimulus2.
Insection4weexploretheimpactof thecrisisandunpicksomeofthemechanismsatwork
byinitiallysurmisingwhatwouldhavehappenedhadtheUnitedStatesalonebeenaffected
2
bythecrisis.Wealsoexplorethecriticalroleofthereappraisalofriskpremiums,in
particularwhethertheshocksarepermanentortemporary3.
TheeffectsofthemassivepolicyresponseareaddressedinSection5.Itturnsoutthatmostof
themonetaryeasingisalreadycapturedbytheendogenousmonetarypolicyruleincorporated
intothemodel,butnotsothefiscalstimulusdeployedaroundtheworldsoweconcentrateon
thisaspectinthissection.
Finally,insection6,someofthemaininsightsarehighlightedanddiscussed.
2. Themodel
TheGCubedmodelisanintertemporalgeneralequilibriummodeloftheworldeconomy.
ThetheoreticalstructureisoutlinedinMcKibbinandWilcoxen(1998)4.Anumberof
studiessummarizedinMcKibbinandVines(2000)showthattheGcubedmodelling
approachhasbeenusefulinassessingarangeofissuesacrossanumberofcountriessincethe
mid1980s.5 Someoftheprincipalfeaturesofthemodelareasfollows:
Themodelisbasedonexplicitintertemporaloptimizationbytheagents(consumersand
firms)ineacheconomy6.IncontrasttostaticCGEmodels,timeanddynamicsareof
fundamentalimportanceintheGCubedmodel.TheMSGCubedmodelisknownasa
DSGE(DynamicStochasticGeneralEquilibrium)modelinthemacroeconomicsliterature
andaDynamicIntertemporalGeneralEquilibrium(DIGE)modelinthecomputable
generalequilibriumliterature.
Inordertotrackthemacrotimeseries,thebehaviorofagentsismodifiedtoallowfor
shortrundeviationsfromoptimalbehavioreitherduetomyopiaortorestrictionsonthe
abilityofhouseholdsandfirmstoborrowattheriskfreebondrateongovernmentdebt.
Forbothhouseholdsandfirms,deviationsfromintertemporaloptimizingbehaviortakethe
formofrulesofthumb,whichareconsistentwithanoptimizingagentthatdoesnot
updatepredictionsbasedonnewinformation aboutfutureevents.Theserulesofthumb
arechosentogeneratethesamesteadystatebehaviorasoptimizingagentssothatinthe
longrunthereisonlyasingleintertemporaloptimizingequilibriumofthemodel.Inthe
shortrun,actualbehaviorisassumedtobeaweightedaverageoftheoptimizingandthe
ruleofthumbassumptions.Thusaggregateconsumptionisaweightedaverageof
consumptionbasedonwealth(currentassetvaluationandexpectedfutureaftertaxlabor
income)andconsumptionbasedon currentdisposableincome.Similarly,aggregate
investmentisaweightedaverageofinvestmentbasedonTobinsq(amarketvaluationof
3 Given the importance of changed risk premia and expectations we explore this issue further in a
companion paper where we also look at what happens when businesses and household initially expect
the worst but then unexpectedly change their view of the world to a temporary scenario. The paper is
McKibbin and Stoeckel (2009b)
4 Fulldetailsofthemodelincludingalistofequationsand parameterscanbefoundonlineat:www.gcubed.com
5 Theseissuesinclude:Reaganomicsinthe1980sGermanUnificationintheearly1990sfiscalconsolidationinEurope
inthemid1990stheformationofNAFTAtheAsiancrisisandtheproductivityboom intheUS.
6 SeeBlanchardandFischer(1989)andObstfeldandRogoff(1996).
3
theexpectedfuturechangeinthemarginalproductofcapitalrelativetothecost)and
investmentbasedonabackwardlookingversionofQ.
Thereisanexplicittreatmentoftheholdingoffinancialassets,includingmoney.Money
isintroducedintothemodelthrougharestrictionthathouseholdsrequiremoneyto
purchasegoods.
Themodelalsoallowsforshortrunnominal wagerigidity(bydifferentdegreesin
differentcountries)andthereforeallowsforsignificantperiodsofunemployment
dependingonthelabormarketinstitutionsineachcountry.Thisassumption,whentaken
togetherwiththeexplicitroleformoney,iswhatgivesthemodelitsmacroeconomic
characteristics.(Hereagainthemodel'sassumptionsdifferfromthestandardmarket
clearingassumptioninmostCGEmodels.)
Themodeldistinguishesbetweenthestickinessofphysicalcapitalwithinsectorsand
withincountriesandtheflexibilityoffinancialcapital,whichimmediatelyflowstowhere
expectedreturnsarehighest.Thisimportantdistinctionleadstoacriticaldifference
betweenthequantityofphysicalcapitalthatisavailableatanytimetoproducegoodsand
services,andthevaluationofthatcapitalasaresultofdecisionsabouttheallocationof
financialcapital.
Asaresultofthisstructure,theGCubedmodelcontainsrichdynamicbehaviour,drivenon
theonehandbyassetaccumulationand,ontheotherbywageadjustmenttoaneoclassical
steadystate.Itembodiesawiderangeofassumptionsaboutindividualbehaviourand
empiricalregularitiesinageneralequilibriumframework.Theinterdependenciesaresolved
outusingacomputeralgorithmthatsolvesfortherationalexpectationsequilibriumofthe
globaleconomy.Itisimportanttostressthatthetermgeneralequilibriumisusedtosignify
thatasmanyinteractionsaspossiblearecaptured,notthatalleconomiesareinafullmarket
clearingequilibriumateachpointintime.Althoughitisassumedthatmarketforces
eventuallydrivetheworldeconomytoneoclassicalsteadystategrowthequilibrium,
unemploymentdoesemergeforlongperiodsduetowagestickiness,toanextentthatdiffers
betweencountriesduetodifferencesinlabormarketinstitutions.
Intheversionofthemodelusedherethereare6sectors(energy,mining,agriculture,
manufacturingdurables,manufacturingnondurablesandservices)and15countries/regions
assetoutinTable2.2.
2.2Countries/regions
UnitedStates
China
Japan
India
UnitedKingdom
OtherAsia
Germany
LatinAmerica
EuroArea
OtherLDC
Canada
EastEurope& FormerSovietUnion
4
Australia
OPEC
Restof OECD
3.Simulatingtheeffectsofthecrisis
Eventsleadinguptothecrisisin2008 thebaseline
Thefocusofthispaperisondisentanglingthemanyinfluencesofthefinancial crisison the
globaleconomyandinparticulartoseehowwellthemodelcanexplainthemacroeconomic
andsectoral responsestothecrisisinconfidencethatwemodelthroughriskshocks.The
crisisisdefinedhereastheburstingofthehousingmarketbubbleinlate2007,theensuing
collapseinthesubprimemortgagemarketandrelatedfinancialmarketsandthesubsequent
collapseofLehmanBrothersin2008whichresultedin asharpincreaseinriskpremiaaround
theworld.
Theprobleminpreciselymodellingthecrisisisthattherearealreadyshocksinthebaseline
thataffectsubsequentglobaldynamicsindependentlyofthecrisis.Herewearefocussing
onlyontheadditionalshocksfromthecrisis.Theproblemisthatsomeof theseedsofthe
financialcrisisweresowninthedecadebeforethecrisis. Therewereaseriesof largeglobal
events,suchastheburstingofthedotcombubblein2001andthe rapidgrowthofChina,that
werealready reshapingthepatternandlevelofworldtradebefore the20072008financial
crisishit.Someoftheseevents,likethelargedisparitiesbetweensavingsandinvestmentin
China(asurplus)andintheUnitedStates(adeficit) ledtolargedifferencesbetweenexports
andimportsforeachnationsothatlargecurrentaccountsurpluseswereaccumulatingin
ChinaandlargedeficitsinAmerica.Somepeople7attributethesegrowingglobalimbalances
ascontributingcausesofthecrisis,andthereissometruthinthat.Butthefocusofthisstudy
isontheimpactofthecrisisitselfonworldtradeandnoton tryingtodisentanglethevarious
contributingfactors tothecrisis,asimportantasthatissueis.
Therefore,besidespopulationandproductivitytrendsshapingthebaselinefortheworld,
someofthekeyeventsoverthelastdecadeinfluencingthebaselinewouldbe:
First,therewastheAsianfinancialcrisisof199798,whichsawAsianeconomies
generatelargecurrentaccountsurplusesthathadtobeinvestedoffshoretokeeptheir
nominalexchangerateslow.CapitalflowedoutofAsiaintoUSdotcomstocksdrivingup
equityprices.
Nextwastheburstingofthedotcombubble,whichsawtheboomingNASDAQover
19982000burstin2001.
7 For example, see Max Corden, The world credit crisis: understanding it and what to do,
5
Fearingadownturnandpossibledeflation,theUSFederalReserveeasedmonetarypolicy
in2001inaseriesofstepsto2004.Somearguethattheyeasedtoomuchfortoolong8.
But,witheasycreditandarisinghousingmarket,aboominhousepricesfollowedanda
periodof highgrowthin creditandleveragedloans.Riskpremiahitlowlevelsand
leverageddealsbecamecommonasinvestorschasedyieldsinanenvironmentoflax
regulatoryoversight.
RisingdemandsfromChina(and,tosomeextent,India),plusaboomingworldeconomy
sawcommoditypricesriseacrossoil,mineralsandfoodfromlate2004tolate2007.The
shocktotheglobaleconomy fromthiscommoditypriceboom wasasbigasthefirstoil
shockinthe1970s9.
Risingpricesandinflationcausedmonetaryauthoritiestotightenpolicyfrommid2004to
June2006.
Eachofthesemajoreventssetuptheirowndynamicsforthecourseoftheworldeconomy
andhelpedshapetheunderlyingbaseline.Someoftheseeventssuchastheeasingand
tighteningofmonetarypolicyareendogenoustothemodelandalreadyincorporatedinthe
baseline. Itisimportanttoappreciatethattheresultsreportedherearedeviationsfrom
baselinefromthefinancialcrisis,asdefinedhere.Whatisimportantistherelative
contributionofdifferenteffectsandtodisentangletheimpactsofthefinancialcrisison the
globaleconomyintheshorttomediumrun.
Thefive shockstorepresentthecrisisandthepolicyresponses
Theaboveeventshaveledtothenowwellknownglobaldownturn.Allofficialforecasting
agencies,suchastheIMFandOECD,havedescribedthisdownturnandsowillnotbe
expandedhere.AstheIMFnotesGlobalGDPisestimatedtohavefallenbyan
unprecedented5percentinthefourthquarter(annualized),ledbyadvancedeconomies,
whichcontractedbyaround7percent10.Japanhasbeenparticularlyhardhitwithafourth
quarterGDP (2008) plummetingby13percent.Demandfordurablegoodshasbeen
particularlyhardhit.Withthedownturntherehasbeenasharpupturninsavingsby
households(andcommensuratereductioninconsumption),drivenbyareappraisalofriskby
householdsandalossofnetworthwithfallinghousepricesandequityprices.Soshocks
needtobedevisedtoaccountforthreethings
Theburstingofthehousingbubbleandlossinassetpricesandhouseholdwealthwith
consumerscuttingbackonspendingandliftingsavings.
8 Notably John Taylor, see Taylor, J.B. 2008, The Financial Crisis and the Policy Responses: An Empirical
UK, p. 4.
6
Asharpreappraisalofriskwithaspikeinbondspreadsoncorporateloansandinterbank
lendingrateswiththecostofcredit,includingtradecredit, risingwithacommensurate
collapseof stockmarketsaroundtheworld.
Amassivepolicyresponseincludingamonetarypolicyeasing,bailoutsoffinancial
institutionsandfiscalstimulus.
Thesethreeoutcomescanberepresentedbyfiveshocksthreeforthecrisisitselfandtwo
forthepolicyresponse.
Three main shocks capture the onset of the global financial crisis:
1. Theburstingof thehousingbubblecausingareallocationofcapitalandalossof
householdwealthanddropinconsumption.
2. Asharpriseintheequityriskpremium(theriskpremiumofequitiesoverbonds)causing
thecostofcapitaltorise,privateinvestmenttofallanddemandfordurablegoodsto
collapse.
3. Areappraisalofriskbyhouseholdscausingthemtodiscounttheirfuturelaborincomeand
increasesavingsanddecreaseconsumption.
Shock1:Theburstingofthehousingbubble
Fallinghousepriceshasamajoreffectonhouseholdwealth,spendinganddefaultsonloans
heldbyfinancialinstitutions.EventsintheUnitedStatestypify aglobal phenomenon.From
2000to2006,housepricesinsomeareasdoubledtosubsequentlycollapse(chart3.1). These
changesinsomeareashavegenerateddramaticnewsheadlinesbut,overalltheUnitedStates
indexofhousepriceshasfallenby6.2percentinrealtermsfromthe1st quarter2008tothe
samequarterin200911.
Whilehousepriceswererisingsostrongly,creditwassuppliedliberallytomeetthedemand
asperceptionsofriskfell.Therisingwealthboostedconfidenceandspending.Thehousing
bubblewasaglobalphenomenoncenteredmainlyontheAngloSaxonworld.
7
3.1 UShousepricesrelativetopercapitahouseholdincome
220
220
Inthesunbeltashousepricesrose,
perceptionsofriskdeclinedand
creditstandardsdeclinedboosting
demandanddrivingpriceshigher.
Asthebubbleburst,seemingly'safe
asbricksandmortar'investments
lostalmosthalfoftheirvalue,oneof
therootcausesofthecurrent
financialproblems.Butpricesare
nowmuchclosertofairvalue.
200
Index2000=100
180
160
LosAngeles
200
Miami
180
160
Phoenix
140
120
140
120
National
100
100
80
80
Nov1987
Nov1990
Nov1993
Nov1996
Nov1999
Nov2002
Nov2005
Nov2008
aNotes:Seriesshownarehousepricesoverpercapitahouseholdincome.Forcomparisonseriesare
indexedtoacommonbase2000=100.IndividualcitiesarefromtheS&PCaseSchillerindex.National
pricesarefromtheOFHEO.OFHEOdatahasacompletecoverageoftheUSwhiletheCaseSchiller
indexonlycoversthelargest20cities.OFHEOandCaseSchillerdataforindividualcitiesindicate
similarmovementsi.e.differencesintheserieslargelyreflectthecoveragedifferences.(Thewidely
reportedCaseSchillerindexshowsmuchlargerfallsthantheOFHEOindex.)
Datasource:StandardandPoors,OfficeofHousingEnterpriseOversight,OECDEconomicOutlook
Database.
Thehousingbubblewastheresultofalongperiodoflowinterestratesby theUSFederal
Reserve.TheFederalReservecutinterestratesbyatotalof550basispointsinaseriesof
stepsbetween2001and2004.Theeasing,subsequenttighteningandcurrenteasingare
showninchart3.2.Somebelieve(forexampletheAustrianschoolandJohnTaylor12),that
monetarypolicywastooloosefortoolongandthisiswhatgaverisetotheassetpricebubble
andcommoditypricespike.TaylorarguesthathadtheFederalReservefollowedtheTaylor
rule(actuallytheHendersonMcKibbinTaylorrule),interestrateswouldhaverisenmuch
soonerandthebubblesnotappeartothesameextent(chart3.2).
12 Taylor, J.B. 2008, The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong,
p. 2.
8
3.2 Federalfundsrate Actualandcounterfactual
9
Federalfundsrate(%)
8
7
Actual
6
Taylorrule
5
4
3
2
1
0
Jan90
Jan92
Jan94
Jan96
Jan98 Jan00
Jan02
Jan04
Jan06
Jan08
Note:Thedailyeffectivefederalfundsrateisaweightedaverageofratesonbrokeredtrades.Weekly
figuresareaveragesof7calendardaysendingonWednesdayofthecurrentweekmonthlyfigures
includeeachcalendardayinthemonth.Annualisedusinga360dayyearorbankinterest.
Datasource:USFederalReserveStatisticalRelease,
http://www.federalreserve.gov/releases/h15/data/Monthly/H15_FF_O.txt,Accessed5March2009.
Whilelowinterestrateswereduetofearsof deflation13andledtoaboominUShousing,
lowinterestrateswerenotjusttheresultoftheFedsactions.USbondyieldswerealsolow
becauseoflowworldrates(withJapanesebondyieldsatalittleover1percentandshort
terminterestratesatzero).TherewasalsoaninternationalaspecttolowUSinterestrates
withJapanandEuropeonlyrecoveringveryslowlyfromthe200001downturnandinturn
placingpressureontheUStokeepinterestrateslow.InJapantherewerefearsofre
emergentdeflation.ThatistheprincipalreasonwhyinterestrateswerekeptlowintheUSfor
anunusuallylongterm untilmid2004whentheFedbeganaverysharptightening
cycle14.Thelowinterestratesthrough200304 besidesfuellingaboominbanklending,
risingassetpricesandrisingdemandinChinaandotherdevelopingcountriesalsofuelled
acommoditypriceboom.
However,onlyapartofthedwellingboomandthecommodityboomcanbeattributedtothe
actionsoftheFed.TheuptrendinUShousepriceswasevidentasearlyas2000.Assmall
investorsabandonedthestockmarketin2001,theydivedintothehousingmarket,drivingup
andsustainingthepricerises.Similarly,thesurgeincommoditypricesthrough2005to2008,
whichtookmostanalystsbysurprise,hadasmuchtodowithdevelopmentsinChina,andthe
laggedresponseofsupply,astheydidwithanincreaseindemandinNorthAmerica.Where
therealproblemlaywasinthecombinationofthetwo.
Theburstingofthehousingbubbleismodelledasasurprisefallintheexpectedflowof
servicesfromhousinginvestmentlargerintheUnitedStates,UnitedKingdomandEurope
butstillsignificantthroughouttheworld. Inthemodel,thehouseholdineacheconomyis
modelledassolvinganintertemporalconsumptionproblemsubjecttoanintertemporal
13 For example, see Alan Greenspans account in The Age of Turbulence, Allen Lane, 2007, pp228229.
14 The sharpest, in fact, since the Volker deflation of the early 1980s.
9
budgetconstraint.Theresultisatimeprofilefortheconsumerineachcountryof
consumptionofgoodsfromallcountriesbasedonexpectedfutureincomeandexpected
relativegoodsprices.Thehouseholdalsochoosesinvestmentinacapitalgood.The
householdcapitalstockcombineshousing,andotherdurablegoods.Forsimplicityof
expositionwewillrefertothiscapitalgoodashousingfromhereon.
Theinvestmentdecisionbyhouseholdsismodelledanalogouslytohowwemodelthe
investmentdecisionsoffirmswithinanintertemporalframeworksubjecttoadjustmentcosts
forcapitalaccumulation.Thehouseholdinvestsinhousingtomaximizeconsumptionfrom
thestreamoffutureserviceflowsthathousingprovides.Thisstreamofservicesisanalogous
toaproductionfunctionbasedoninputsofcapitalandaproductivityterm.Wemodelthe
housingpartofthecrisisasafallintheproductivityoftheserviceflowfromthehousing
stock.ThisfallinexpectedfutureproductivityofhousingmeansthattheTobinsqfor
housingdropswhentheshockoccurs. ThedropinhousingproductivityintheUnitedStates
isassumedtobe10percentlowerin2009andiscalibratedtogive,alongwiththeother
shocks,adropinhousepricesintheUSoftheorderof 6percent, roughlywhathasbeen
observedforthelastyear15.Aplausiblescenarioiswhereproductivityreturnstonormalby
2013.
Shock2:Risingequityriskpremia
Thesurpriseupswingincommoditypricesfrom2003butmostnoticeableduring2006and
2007ledtoconcernsaboutinflationleadingtothesharpreversalinmonetarypolicyinthe
US. ThistighteninginUSpolicyalsoimpliedatighteningofmonetarypolicyineconomies
thatpeggedtotheUSdollar.ItwasthesharpnessofthisreversalasmuchasthefallinUS
housepricesandthefailuresoffinancialregulation(forexample,themortgageunderwriters
FannieMaeandFreddieMac)thatledtothefinancialproblemsfor20080916.Lehman
BrothersfailurewasprimarilyduetothelargelossestheysustainedontheUSsubprime
mortgagemarket.Lehman'sheldlargepositionsinthesubprimeandotherlowerrated
mortgagemarkets.ButmortgagedelinquenciesroseaftertheUShousingpricebubbleburst
in200607.Inthesecondfiscalquarter2008,Lehmanreportedlossesof$2.8billion.Itwas
forcedtoselloff$6billioninassets17. ThefailureofLehmanBrothersinSeptember2008
andeffectonriskpremiumsacrossmarketscanbeseenclearlyonchart3.3.
15 A 10 per cent permanent drop in housing productivity in the United States alone gives a 5.4 per cent
drop in housing values one year later. See McKibbin, W and Stoeckel, A, Bursting of the US housing
Bubble, Economic Scenarios No 14, www.economicscenarios.com.
16 Similarly, the tightening cycle of the mid1980s was one factor leading to the Savings and Loan crisis.
17 New York Times, Thursday, 26 February 2009.
10
3.3 TheLehmanBrothersbankruptcyandriskpremia
7
Riskpremiumon
Corporatebonds(BAA
rated)
Theriskpremiumonshortterminterbank
borrowingrosesharplywhenLehmanBrothers
enteredChapter11bankruptcyprotectionin
September2008.Thispushedupthepremiumon
corporateborrowingrelativetoUStreasuries.As
therealeconomyhasdeteriorated,corporaterisk
premiahaveremainedextraordinarilyhigh.
%points
4
Sep11
attacks
2
Lehman
bankruptcy
Riskpremiumon
interbankborrowing
1
30Jul2001
30Jun2003
30May2005
30Apr2007
30Mar2009
aNotes:Weeklydata.Riskpremiumoninterbankborrowingapproximatedbytherateononemonth
EurodollardepositslesstheFederalfundsrate.Riskpremiumoncorporatebondsmeasuredasthe
yieldonBAAratedcorporatebondslessthe10yearTreasurybondyield.
Datasource:FederalReserveBoard.
Theinitial riseintheequityriskpremiumsincethecollapseofLehmanBrothershas
beenoftheorderof8percentagepoints.Butwhatwillmatterfortheresultsiswhether
theinitialriseinequityriskpremiumcontinuesintothefutureandisindicativeofa
newstateofaffairsbybusinessorwhetheritturnsouttobetransitory.Argumentscan
bemadeeitherway.Atthetimeofthecrisistherewasplentyofcommentary,someof
itfromofficialinstitutions,aboutdireconsequencesandparallelsdrawntotheGreat
Depression.Butthepolicyresponsewasalsomassivewiththeclearintentionofgetting
thingsbacktonormalassoonaspossible.Henceunderthisshockofariseinequity
riskpremium,toseethedifferenceitmakes,wemodel twoscenariosonewherethe
riskpremiumispermanentlyhigherby8%andtheotherascenariowheretherisk
premiumfallsbyhalfinyear2andthenisbacktobaselinebyyear3.Welabelthefirst
onepermanentandthesecondtemporary.
Shock3:Ariseinhouseholdrisk
Thereappraisalofriskbyfirmsasaresultofthecrisisalsoappliestohouseholds.As
householdsviewthefutureasbeingmorerisky,sotheydiscounttheirfutureearningsand
thataffectstheirsavingsandspendingdecisions.Aswiththepreviousshock,wemodeltwo
scenarios:onepermanentandtheothertemporary.Theincreaseinhouseholdriskinthe
UnitedStatesisassumedtobe3percentagepointsinthepermanentscenarioandreturningto
zerobyyearthreeinthetemporaryscenario.
11
Summaryofthreecrisisshocksandcountrydifferences
Thethreeshocksby sector theUnitedStatesareshownintable3.4.
3.4 Equityriskpremium,householdriskandhousingproductivityfortheUnited
Statesunder thetemporaryandpermanentscenarios
Permanentscenario
Equityriskpremiumby
sector:
Energy
Mining
Agriculture
durablemanufacturing
nondurable
manufacturing
services
Householdrisk
Housingproductivity
Temporaryscenario
Equityriskpremiumby
sector:
Energy
Mining
Agriculture
durablemanufacturing
nondurable
manufacturing
services
Householdrisk
Housingproductivity
2009
2010
2011
2012
2013
2014on
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
8
3
10
3
8
3
6
3
4
3
4
3
4
8
8
8
8
4
4
4
4
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
8
8
4
4
0
0
0
0
0
0
0
0
3
10
1.5
5
0
0
0
0
0
0
0
0
Source:authorscalculations.
Theshocksintable3.4arefortheUnitedStates theepicentreofthecrisis.Butnotall
countrieshavebeenequallyaffectedbythecrisis.Forexample,durablemanufacturingin
Japanwouldbehitharderbytheriskreappraisalgiventhecollapseoftheirdurableexports
(dominatedbycars)asaresultofthecombinationoftheglobaldownturnandthe
appreciationoftheYen thatresultedfromthecollapseincommoditypricesandimprovement
intheirtermsoftrade.
Also,JapanhadtheirhousingbubbleadecadeearlierthandidtheUnitedStates,sooverthe
lastfewyearsthey neverexperiencedapropertybubbleasinAmerica.Sotheshocktotheir
economyfromtheburstingofthehousingbubblewouldbelessthanfortheUnitedStates.
12
Therefore theshocksforequityrisk,thehousingbubbleburstingandhouseholdriskare
scaledofftheUnitedStates.TakingtheUnitedStatesas1aseriesofweightsforother
sectorsandeconomiesappearsintable3.5.
3.5 Weightforcountryandsectorshocks
USA
Equityriskby
sector
energy
mining
agriculture
durable
manufacturing
nondurable
manufacturing
services
Householdrisk
Household
productivity
CHI
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1.2
1
1
1.2
1
1
1
1
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
1.2
1.2
0.8
0.8
0.8
0.8
0.8
0.8
0.8
1
1
1
1
1
1.2
1
1
1
1
1
1
1
1
1
1
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.3
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.1
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
Two mainshockscapturethepolicyresponses
Ontopoftheabovethreefinancialcrisisshockstherehasbeen an unprecedentedpolicy
responsecomprisingthreemoreelements:
4. Aneasingofmonetary policy tonearzeroofficialratesofinterestinmajordeveloped
economies.
5. Aneasingoffiscal policy acrosscountriesandlargerunupin governmentdeficits.
Shock4:Monetaryeasing
Thereisanendogenousmonetaryresponseinthemodelforeacheconomy whereeach
economyfollowsaHendersonMcKibbinTaylorruleasshowninequation(1)withdifferent
weightsoninflation()relativetotarget,outputgrowth(y)relativetopotentialandthe
changeintheexchangerate(e)relativetotarget.
T
T
T
it =it-1+b1(p t p t )+ b 2(Dyt D yt )+ b 3(Det D et )
(1)
TheassumedparametervaluesaresetoutinTable3.6.NotethatChinaandmostdeveloping
economieshaveanonzeroweightonthechangeinthe$USexchangerate. Themonetary
easingthathasoccurredisclosetotheendogenousmonetarypolicyresponsealreadybuilt
intothemodelsoanyextramonetarystimulusisnotrequired.Ofcourseitispossiblethat
authorities,beingfearfulofraisinginterestratestooearlyandprickingthenascentrecovery,
couldendupeasingtoomuchfortoolongandwouldbeaninterestingsimulation,especially
ifdifferentcountrieschosedifferentamountsofovereasingwhichwouldsetupcapital
flowchangesandhencetradeflowchanges.
13
3.6:CoefficientsinHendersonMcKibbinTaylorRulesinEachCountry
inflation(1) outputgrowth(2) $USExchangerate(3)
USA
0.5
0.5
0
JPN
0.5
0.5
0
GBR
0.5
0.5
0
DEU(*)
0.5
0.5
0
EUR(*)
0.5
0.5
0
CAN
0.5
0.5
0
AUS
0.5
0.5
0
OEC
0.5
0.5
0
CHI
0.5
0.5
1
IND
0.5
0.5
0
OAS
0.5
0.5
1
LAM
0.5
0.5
1
LDC
0.5
0.5
1
EEB
0.5
0.5
1
OPC
0.5
0.5
10
(*)NotethatGermany(DEU)andtherestoftheEurozone(EUR)havea
commoninterestratewithaweightonEuropeanwideinflationandoutputgap.
Shock5:Fiscaleasing
Thereisanendogenousfiscalpolicyresponseinthemodelbuttheruleisatargetingoffiscal
deficitsasapercentof GDP.Theeasingoffiscalpolicyannouncedbymosteconomieshas
beenanextraunprecedentedstimulusinthemoderneraandexpansionoffiscaldeficitsand
hastobesimulated.
Thediscretionarystimuluspackagesannouncedbyeachcountryhavemainlyoccurredover
2009and2010andisusefullysummarisedbytheOECD18.FortheUnitedStatesthe
cumulativestimulusisnearly5percentofGDPandforChinaitisover11percentofGDP.
Itisunlikelythatsuchastimuluswillsuddenlyendin2010fortworeasons:itishardto
crankupgovernmentspendingonthingslikeinfrastructurequicklyandgovernmentsusually
findithardtoreigninspendingquicklyonceprogramsareannounced.Therefore,whilst
assumingthesamecumulativefiscalresponseasoutlinedbytheOECDandotherstudies,the
fiscalresponsehasbeenassumedtotaperoffquicklyafter2010butfinishingin2012.The
assumedfiscalresponseisoutlinedintable3.7.
18 OECD 2009, Fiscal Packages Across OECD Countries: Overview and Country Details, Paris, 31 March.
14
3.7The assumed fiscal policy responsepercentofGDP
Country/region
UnitedStates
2009
2010
2012
2013 Cumulative
2.07
1.55
1.04
0.52
5.18
Japan
1.46
1.10
0.73
0.37
3.65
UnitedKingdom
1.32
0.99
0.66
0.33
3.29
Germany
1.38
1.04
0.69
0.35
3.45
Euroarea
1.30
0.98
0.65
0.33
3.25
Canada
1.68
1.26
0.84
0.42
4.20
Australia
2.48
1.86
1.24
0.62
6.21
RestofOECD
1.00
0.75
0.50
0.25
2.50
China
4.80
3.60
2.40
1.20
12.00
India
0.50
0.38
0.25
0.13
1.25
OtherAsia
2.00
1.50
1.00
0.50
5.00
LatinAmerica
0.50
0.38
0.25
0.13
1.25
OtherLDC
0.50
0.38
0.25
0.13
1.25
EEFSU
1.70
1.28
0.85
0.43
4.25
OPEC
3.00
2.25
1.50
0.75
7.50
Source:OECD2009andauthorscalculations.
4. Effectsofcrisiswithouta fiscalpolicyresponse
Mechanismsatwork
Toappreciatethemechanismsatworkfromthethreeshocksanillustrativescenariowhere
permanentshocksaffecttheUnitedStatesaloneisshowninchart4.1.Theburstingofthe
housingbubblehasthebiggestnegativeimpactonrealconsumption,whichbeingroughly70
percentofthedomesticeconomy,hasthebiggestnegativeimpactonrealGDP.The
permanentlossinwealthcausesconsumptiontofallsharplyandbecausethehousingshockis
assumedtobepermanent,consumptionispermanentlylowerinallperiodsasshownon
Chart4.1.
Thefinancialshockhasthelargestnegativeimpactonstockmarketvaluesfrombaselinein
2009andanequallylargeimpactastheburstingofthehousingbubbleoninvestment.The
equityriskshockcausesashiftoutofequitiesintootherdomesticassets,suchashousingand
governmentbondsaswellastoassetpurchasesoverseas.Theshiftintogovernmentbonds
drivesuptheirpricesandpushesdownrealinterestratessubstantially.Thissurprisingly
raiseshumanwealthbecauseexpectedfutureaftertaxincomeisdiscountedatamuchlower
real interestrate.ThusintheUS,theequityshockaloneispositiveratherthannegativefor
consumptionintheshortrun.
Investmentontheotherhandfallssharply.TheequityshockreducesUSinvestmentbyabout
20percentbelowbaseline.Theriseinequityriskimpliesasharpselloffofsharesduetoa
15
largeriseintherequiredrateofreturntocapital.Thehigherequityriskpremiumimpliesthat
theexistingcapitalstockistoohightogeneratethemarginalproductrequiredfromthe
financialarbitrageconditionandinvestmentfallsand,overtime,duetotheexistenceof
adjustmentcosts,thecapitalstockfallsandpotentialoutputispermanentlyreduced.
UnderthissimulationwheretheUSaloneisassumedtobeaffectedbythecrisis,thereisa
largeimpacton USexports(bottomlefthandpanelofchart4.1)becausethereisalarge
capitaloutflowfromtheUSasUSsaversinvestoffshoreinthehouseholdriskshock.TheUS
trade balanceimprovesby4percentofGDPprimarilyduetoasharpdepreciationoftheUS
dollar.
EachofthethreeshockshasanegativeeffectontheUnitedStatesand,combined,hasthe
effectofloweringrealGDPby7percentbelowbaselinein2009andrealGDPdoesnot
returntobaselineuntil2017,nearlyadecadelater. ThatissufficienttoputtheUSinto
recessionin2009(baselinegrowthis3.4percent)butwillallowpositivegrowthin201019.
Akeycompositionaleffectalsooccurswhenhouseholddiscountratesriseandriskpremia
generallyrise.Theeffectisamuchsharperfallinthedemandfordurablegoodsrelativeto
othergoodsintheeconomy.ThisisshownclearlyinChart4.2.Importsanddomestic
productionofdurablegoodsfallsbymorethannondurablegoods.Thedifferencesare
substantial.Thehighriskadjustedcostleadstoareductionintheflowofservicesfrom
durablesandthereforethedemandforthesegoodsdropssharply.Thiscompositionaleffectis
criticalforthetradeoutcomes.Countriesthatexportdurablegoodsareparticularlyaffected
by acrisisofthetypemodelled.
TherecessionintheUnitedStateshastwomaineffectsontheworldeconomy.Oneisthe
negativeknockoneffectfromthelossinactivitywiththoseeconomiesmostdependenton
theUnitedStatesmarketmostaffected.Thesecondeffectrunscountertothefirst.As
prospectsdimintheUnitedStates,sothereturnsoninvestmentlookbetterelsewhere.Money
flowsoutoftheUnitedStates(orstrictlyinthecaseoftheUS,lessinflowthanotherwise)
andintoothereconomieswhereitstimulatesinvestmentandeconomicactivity.Thisis
illustratedbytheeffectonChina(seechart4.3).TheUnitedStatesisalargeimporterfrom
China.AsUSimportsfall,Chinasexportsfall(seebottomlefthandpanelof4.3),witha
combinedeffectfromthethreeshocksofadropin
19 Note that all results are presented as deviations from a baseline projection. A fall in GDP of 7% in year 1,
relative to baseline, where the baseline growth rate was 3.4% is a new growth rate in the first year of
negative 3.6% (i.e. a recession). If the level of GDP remains 7% lower forever, the growth rate of GDP in
year 2 is back at baseline growth. Thus in growth rate terms, the crisis is resolved after the first year in
many countries although the level of GDP remains below baseline for many years.
16
4.1 ImpactofaUSonlyPermanentfinancialcrisisontheUnitedStates
USConsumption
USGDP
1
9 10 11 12
5.00
0.00
0.00
%deviation
%deviation
0
2.00
2.00
4.00
6.00
9 10 11 12
5.00
10.00
15.00
8.00
20.00
housing
financialrisk
householdrisk
GFC
housing
financialrisk
USStockMarketValue
0
9 10 11 12
%deviation
%ofbaselineGDP
5.00
0.00
5.00
10.00
15.00
20.00
25.00
financialrisk
householdrisk
GFC
housing
9 10 11 12
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
housing
financialrisk
householdrisk
GFC
financialrisk
9 10 11 12
householdrisk
GFC
9 10 11 12
financialrisk
householdrisk
GFC
USInflationRate
7
9 10 11 12
30.00
25.00
20.00
15.00
10.00
5.00
0.00
5.00
10.00
15.00
housing
2.00
1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
housing
%change
%pointdifference
financialrisk
USExports
0
USRealInterestRate
%pointdifference
%ofbaselineGDP
20.00
10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
USTradeBalance
0
GFC
USInvestment
10.00
housing
householdrisk
householdrisk
GFC
Datasource:GCubedmodelsimulations
9 10 11 12
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1.00
2.00
3.00
4.00
housing
financialrisk
householdrisk
GFC
17
4.2 ImpactofaUSonlypermanentfinancialcrisisonDurablesverusNonDurable
goodsintheUnitedStates
ProductionandImportsofDurablesandNonDurables
0
%deviationfrombaseline
10
15
20
25
30
35
40
45
durablesimports
nondurablesimports
durablesproduction
nondurablesproduction
Datasource:GCubedmodelsimulations
exportsof5percentbelowbaselinein2009.Chinastradebalanceworsens,butnotehow
smalltheeffectis:barely1percentbelowbaseline(asapercentofGDP).
NotealsothenetsmalleffectonChinasrealGDPeventhoughChinasexportsarealarge
proportionoftheirGDP.WhentheUnitedStatesaloneisaffectedbythecrisis,thereisa
smallcombinedeffectonChinaofareductioninrealGDPof0.75percentbelowbaselinein
2009andapositiveeffectfrom 2011onwards.LookingatChinasrealinvestmentprovides
theanswer.BecauseinvestmentprospectsintheUnitedStatesarenowdireunderthe
combinedscenario,moneyflowselsewhere,onerecipientof whoisChina.Chinasreal
investmentcouldbe3.5percentabovebaselinein2011and2012,inresponsetothe
relatively betterinvestmentprospects. ChinagainsattheUnitedStatesexpense.The
favourablestimulusfromextrainvestmentlargelyoffsetsandeventuallyoutweighsthe
negativeeffectsfromthelossofexportstotheUnitedStates.
TheconclusionisthatthefinancialcrisiswhichstartedintheUnitedStates,haditbeen
confinedtotheUSalone,wouldnothavehaddireconsequencesfortheworldeconomy.Of
coursethereal storyisdifferent.Contagionandrisingriskpremiumseverywherehavecaused
adifferentscenario.WheneveryoneisaffectedtheconsequencesfortheUnitedStatesalso
dependsonwhoandhowothercountriesareaffected.
18
4.3ImpactofaUSonlypermanentfinancialcrisisonChina
ChinaConsumption
ChinaGDP
1
9 10 11 12
5.00
3.00
4.00
%deviation
%deviation
0
4.00
2.00
1.00
0.00
9 10 11 12
3.00
2.00
1.00
0.00
1.00
1.00
2.00
housing
financialrisk
householdrisk
GFC
housing
financialrisk
ChinaStockMarketValue
1
9 10 11 12
12.00
25.00
10.00
20.00
8.00
6.00
4.00
2.00
0.00
GFC
housing
9 10 11 12
9 10 11 12
householdrisk
GFC
9 10 11 12
1.00
%pointdifference
%ofbaselineGDP
ChinaRealInterestRate
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0.00
1.00
2.00
3.00
4.00
5.00
6.00
housing
financialrisk
householdrisk
GFC
housing
financialrisk
ChinaExports
0
9 10 11 12
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
housing
financialrisk
householdrisk
GFC
ChinaInflationRate
0
%change
%pointdifference
financialrisk
ChinaTradeBalance
0
5.00
5.00
householdrisk
10.00
2.00
financialrisk
15.00
0.00
housing
GFC
ChinaInvestment
%deviation
%ofbaselineGDP
householdrisk
householdrisk
GFC
9 10 11 12
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1.00
2.00
3.00
housing
financialrisk
householdrisk
GFC
Datasource:GCubedmodelsimulations
Projectedoutlookfromtheglobalfinancialcrisis withoutfiscalstimulus
Whenall economiesareaffectedbytheglobalfinancialcrisisthroughglobalchangesinrisk
premiaandlossofconsumerconfidence,othercountrieslikeChinaareadverselyaffected.
When othereconomiesarealsoadverselyaffected bythereappraisalofrisk,thecostof
19
capitalforthemalsorisesand,ineffect, causestheexistingcapital stock tobetoolarge.
Equitymarketsplummetasshowninchartset4.4. Investmentplummets,butnoteverywhere
becauseitisrelativeeffectsthatmatter.Theimpactoninvestmentisshownin chartset4.5.
WhereasChineseinvestmentrosewhenjusttheUnitedStateswasassumedtobeaffectedby
thecrisis,nowChineseinvestmentfallstoalowofover10percentbelowbaselinein2010
underthepermanentriskshock
Undertheassumptionsofthesmallerrisein riskpremiaacrosstherestofAsia,Latin
AmericaandLDCs,theseregionsgain relatively fromtheglobalreallocationofinvestment.
Investmentin OtherAsiacouldbe2to4 percenthigheroverbaselinein 2009and2010.
India,China,Australia,otherAsia,Latin AmericaandotherLDCsdonotgointorecession
(seechartset4.6)asaresultoftheglobalfinancialcrisisasrepresentedbythethreeshocks
usedinthisstudy.WhilesomeLatinAmericaneconomiessuchasArgentinaarenotfaring
well atthemoment,thereareotherforcesatworksuchasdroughtandtheimpactoftaxeson
theirexports. Theresultsinchartset4.7 doshow thatexportsfrom allregionstobehithard,
however.Inmostregionsexportsarevariously8to14percentbelowbaselinein2009with
exportsfromAustraliaandIndia20to25percentdownoverthefullyearandcontinueto
remainlowinthecaseofthepermanentscenario.
Oneofthekeyfeaturesofthecrisisisreflectedintheresultsin chartset4.6and4.7.Thereis
asubstantiallylargercontractioninexportsrelativetothecontractioninGDPinall
economies.ThismassiveshiftintherelationshipbetweentradeandGDPisnottheresultof
anassumptionabouttheincomeelasticityofimports.Itreflectssomekeycharacteristicsof
themodel.First,importsaremodelledonabilateralbasisbetweencountrieswhereimports
arepartlyforfinaldemandbyhouseholdsandgovernmentandpartlyforintermediateinputs
acrossthesixsectors.Inaddition,investmentisundertakenbyacapitalsectorthatuses
domesticandimportedgoodsfromdomesticproductionandimportedsources.As
consumptionandinvestmentcollapsemorethanGDP,importswillcontractmorethanGDP.
Onecountrysimportsareanothercountrysexportsthusexportswillcontractmorethan
GDPunlessthereisachangeinthetradepositionofaparticularcountry.Theassumption
thatall riskpremiariseandtheresultsthatallrealinterestratesfallseverywhereimplies
smallchangesintradebalances.
Outcomes for permanent versus temporary risk scenarios
Charts4.4to4.7showsomelargedifferencesdependingonwhethertheshocktoequityrisk
andhouseholdriskispermanentortemporary.Thefirstobservationisthat,asexpected,the
impactsonthestockmarket,investmentandexportsismuchgreaterandlongerlastingwhen
theshockispermanentthanwhenitistemporary.Whereasthedeclineinstockmarketsisup
to20oreven25percentbelowbaselinein2009underthepermanentscenario,underthe
temporaryscenariothedeclineisaround5percent. Thatis,eventhoughinitialshocktorisk
premiaunderthepermanentandtemporaryscenariosisthesamein2009,inmanycasesthe
effectcanbethreetofivetimesgreater,andlongerlasting,whentheshockisexpectedtobe
permanent,comparedtooutcomeswhentheshockisexpectedtobe temporary.Thereasonis
expectations.Asdescribedearlier,becausethisisafullyspecifieddynamicintertemporal
general equilibriummodel,forwardlookingbehaviourby someagentsinthemodel hastobe
allowedfor.Underthetemporaryscenario,householdsandbusinessesexpectriskpremiums
20
tocomedownandbehaveaccordingly.Thisgroupofforwardlookinghouseholdsandfirms
partlyseethroughtheshock.Hencethestockmarketdoesnotfallasmuch,thecollapsein
investmentislessandtheimpactontradeisless.
Twoareaswherethereislessinitialdifferencebetweenthepermanentandtemporary
scenariosisoutcomesforrealGDPandrealinterestrates(chartset4.6andappendixchartset
C.3).In2009,thedifferencesinrealGDPoutcomesasbetweenthetwoscenariosaremainly
confinedtotheUnitedStatesandtheUnitedKingdom.Thereasonsaremainlydueto the
differencesin theassumedhouseholdriskshocksinthecaseofJapanandGermanyandto
thesmallerinvestmenteffectsfortheothersforthereasonsnotedabove.Insubsequentyears
thedifferencesinrealGDPoutcomesbetweenthetwoscenariosforallregionscanbe
substantial.Thereasonisthatunderthepermanentincreaseinriskpremiumsthestockof
capitalshrinkspermanentlyandsodoesrealGDP.
Forrealinterestrates(chartsetC.3intheAppendix)thereisaninitial falleverywhere.
Initiallythefall ininterestratesisby around400basispointsbothreflectingalongrun
declinein themarginalproductofcapitalbutalsoreflectingaresponseofmonetary
authoritiesinloweringnominalinterestrates. Butthereisadifferenceinrealinterestrate
outcomesbetweenthepermanentandtemporary scenariosinsubsequentyears.Underthe
temporaryshock,realinterestrateshaverecoveredbacktobaselineorevenslightlyaboveby
2011duetotheexpectedreturntonormalriskpremiums.
Thedifferencesinresultsbetweenpermanentandtemporaryriskpremiumsposeadilemma
forrepresentingtheglobalfinancialcrisisinamodelsuchastheoneusedhere.Initial
outcomesaroundtheworldareindicativeofthepermanentriseinriskpremiums.But
subsequentdevelopmentsinfinancialmarketsshow thatthetemporaryriskpremiumscenario
ismorelikelytounfold.Thisdilemmaisresolvedintheothercompanionpaperalready
mentioned(McKibbinandStoeckel2009b)wherebybusinessandhouseholdsinitially
assumethepermanentviewofriskbutunexpectedlyswitchtothetemporaryscenario.
21
4.4StockMarketeffectsof apermanentversustemporaryGFC
JapanStockMarket
5.000
0.000
5.000
10.000
permanent
temporary
2020
2019
2018
2017
2016
2015
2014
2013
0.000
5.000
10.000
permanent
temporary
2020
2019
2018
2017
2016
2015
2014
2013
permanent
0
20
2
20
18
20
16
14
20
20
0
20
20
20
18
16
20
14
20
20
12
20
10
temporary
OtherAsiaStockMarket
AustraliaStockMarket
5.000
%deviation
5.000
0.000
5.000
10.000
15.000
20.000
25.000
0.000
5.000
10.000
permanent
temporary
Datasource:GCubedmodelsimulations
permanent
temporary
0
20
2
8
20
1
20
16
20
14
2
20
1
20
08
0
20
2
8
20
1
20
16
20
14
20
12
20
10
15.000
20
1
20
08
20.000
20
12
15.000
10
5.000
10.000
2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
20
%deviation
0.000
temporary
IndiaStockMarket
5.000
20
0
2012
permanent
temporary
ChinaStockMarket
permanent
2011
2008
20
20
8
20
1
6
20
1
14
20
12
20
20
10
20.000
2010
15.000
2009
%deviation
5.000
20
08
%deviation
temporary
GermanyStockMarket
10.000
5.000
0.000
5.000
10.000
15.000
20.000
25.000
30.000
%deviation
2012
permanent
UnitedKingdomStockMarket
%deviation
2011
2008
20
20
20
1
20
16
14
20
20
12
20
10
20.000
2010
15.000
2009
%deviation
10.000
5.000
0.000
5.000
10.000
15.000
20.000
25.000
20
08
%deviation
UnitedStatesStockMarket
22
4.5Investmenteffectsof apermanentversustemporaryGFC
UnitedStatesInvestment
JapanInvestment
5.000
permanent
UnitedKingdomInvestment
%Deviation
0.000
5.000
10.000
2020
2019
2018
2017
2020
2019
2018
2017
2016
0.000
5.000
10.000
temporary
Datasource:GCubedmodelsimulations
0
20
2
20
18
20
16
14
20
20
12
permanent
temporary
0
20
2
8
20
1
20
16
20
14
2
20
1
6.000
4.000
2.000
0.000
2.000
4.000
6.000
8.000
10.000
20
08
%Deviation
0
20
2
8
20
1
20
16
20
14
20
12
temporary
OtherAsiaInvestment
10.000
5.000
0.000
5.000
10.000
15.000
20.000
25.000
20
10
10
permanent
AustraliaInvestment
permanent
20
20
0
20
20
20
18
16
temporary
20
1
permanent
20
14
20
20
12
15.000
20
10
08
15.000
20
2015
5.000
5.000
temporary
IndiaInvestment
10.000
20
0
2014
permanent
temporary
ChinaInvestment
%Deviation
2013
20
20
8
20
1
6
20
1
14
20
12
20
20
10
20
08
40.000
2012
30.000
2011
20.000
2009
0.000
10.000
10.000
5.000
0.000
5.000
10.000
15.000
20.000
25.000
30.000
35.000
2008
%Deviation
%Deviation
10.000
%Deviation
temporary
GermanyInvestment
20.000
permanent
2016
2008
20
20
temporary
2010
permanent
20
1
20
16
14
20
20
12
20
10
20
08
20.000
2015
15.000
2014
40.000
10.000
2013
30.000
2012
20.000
2011
10.000
0.000
5.000
2010
0.000
2009
10.000
%Deviation
%Deviation
20.000
23
4.6GDPeffectsof apermanentversustemporaryGFC
2019
2020
2020
2018
2017
2016
2015
2013
2014
2018
2017
2016
2014
2015
20
20
20
18
20
16
temporary
OtherAsiaGDP
1.000
%Deviation
0.000
1.000
2.000
3.000
permanent
temporary
Datasource:GCubedmodelsimulations
permanent
temporary
20
20
20
18
20
16
20
14
20
12
20
10
20
08
20
20
20
18
20
16
4
20
1
2
20
1
4.000
20
1
2013
permanent
2.000
1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000
20
0
20
14
temporary
20
12
20
0
1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000
20
1
20
20
18
20
16
20
14
20
12
20
10
20
20
%Deviation
2.000
1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000
08
%Deviation
temporary
IndiaGDP
AustraliaGDP
%Deviation
2012
permanent
temporary
ChinaGDP
permanent
2011
2010
2009
1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000
7.000
2008
2020
2019
2018
2017
%Deviation
permanent
temporary
GermanyGDP
2016
2015
2014
2013
2012
2011
2010
2009
2008
%Deviation
UnitedKingdomGDP
2.000
1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000
2012
permanent
2019
temporary
2011
2010
2008
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
permanent
0.500
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
2009
JapanGDP
%Deviation
3.000
2.000
1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000
2008
%Deviation
UnitedStatesGDP
24
4.7Exporteffectsof apermanentversustemporaryGFC
temporary
2020
2019
2018
2016
2015
2014
2013
2017
2020
2019
2018
2017
2016
2015
2014
2013
0
20
2
20
18
20
16
14
20
20
12
permanent
temporary
OtherAsiaExports
temporary
Datasource:GCubedmodelsimulations
permanent
temporary
0
20
2
8
20
1
20
16
20
14
2
20
1
20
1
4.000
2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
20
08
%Deviation
0
20
2
8
20
1
20
16
20
14
20
12
10
8
20
0
temporary
5.000
0.000
5.000
10.000
15.000
20.000
25.000
20
10
20
%Deviation
20
20
20
18
16
20
14
20
20
12
20
10
20
5.000
0.000
5.000
10.000
15.000
20.000
25.000
30.000
AustraliaExports
temporary
IndiaExports
permanent
20
0
2012
permanent
temporary
4.000
2.000
0.000
2.000
4.000
6.000
8.000
10.000
08
%Deviation
2011
2010
2009
2008
%Deviation
20
20
8
20
1
6
20
1
14
20
12
20
20
10
20
08
%Deviation
4.000
2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
ChinaExports
%Deviation
temporary
GermanyExports
6.000
4.000
2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
permanent
2012
permanent
UnitedKingdomExports
permanent
2011
2010
2008
%Deviation
8
20
20
20
1
20
16
14
20
20
12
20
10
permanent
4.000
2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
2009
JapanExports
8.000
6.000
4.000
2.000
0.000
2.000
4.000
6.000
8.000
10.000
20
08
%Deviation
UnitedStatesExports
25
5. Effectsofpolicyresponses
TheresultssofarhavebuiltinamonetaryreactionfunctionintheformofanHenderson
McKibbinTaylorruleforeacheconomywiththeshorttermnominalinterestrateadjustingto
avarietyoffactorsineacheconomy.Therulesassumedinthemodelhavegeneratedan
endogenousmonetaryresponsewhichissimilartothatobservedsofar.Theassumptionofan
unchangedfiscaldeficitisverydifferenttowhathasbeenobserved.Inthissectionwefocus
onannouncedfiscalresponses.TheassumedfiscalpolicychangesweregivenearlierinTable
3.7.Notethatwedonothaveinfrastructurespendinginthemodelsothatthefiscalresponses
hereareassumedtobespendingongoodsandservicesandnotgovernmentinvestmentin
physicalcapital.Expenditureoninfrastructurewouldlikelyalsostimulatemediumtolong
runsupplyinthemodelandthereforechangetheextenttowhichthereiscrowdingoutover
time.Howevertotheextentthateveninfrastructurespendingisademandstimulusforthe
firstfewyearbeforetheprojectsbegintodelivermediumrunsupplyresponses,theinitial
resultsinthisstudycanbeusedtounderstandtheshortrunimpactsofthepackages.
Effectsofthefiscalstimulusalone
Toseethemechanismsatwork,theeffectsofthefiscalstimulusaloneareshowninchartset
5.1.Theseresultsshouldbeaddedtothefinancialcrisisresultstogetapictureofthe
financialcrisis(eitherpermanentortemporary)withfiscalresponse.Indiscussingthese
resultswewilltalkaboutthemrelativetobaselinewhichcanalsobeinterpretedasrelativeto
whatwouldbeseenpostcrisis.
ThefiscalstimulusgivesaboosttorealGDPabovebaselineforallmajoreconomiesand
Chinain2009,thefirstyearofthefiscalpackages.Theeffectsareillustratedbyreferringto
China.ChinasrealGDPcouldbe1.6percentabovewhatotherwisewouldbethecasein
2009,butlittledifferentfrombaselinein2010.RealGDPwouldbebelowbaselinein2011in
Chinaastheeffectsofhigherrealinterestrateskickin.Realinterestratescouldbeover3
percentagepointsabovebaselinein2009and2010(seeappendix charts) offsettingmuchof
thedeclineinrealinterestratesfromtheglobalfinancial shockandmonetarypolicy
responses.Realprivateinvestmentis9percentbelowbaselinein2010.Consideringthe
massive11.4percentcumulativefiscalstimulusinChina,theeffectofthefiscalstimulus
aloneisquitesmall andtransitory.TheeffectonAustralia,despitethesizeofthestimulusis
amodest1.1percenthigherGDPthanotherwisein2009andGDPbelowbaselinein
subsequentyears.
NotethatthefiscalstimulusinthefirstyearraisesGDPbutforallcountriesthiseffectonly
lastsforayearandismuchsmallerthatmanycommentatorsargue.Indeedwhenaddedto
theresultsforthefullGFCsimulationthisfiscalstimulusisnotsufficienttocompletely
neutralizethecrisisinitsimpactonGDP (exceptinAustraliawheretheeconomydoesnot
enterrecessionoverafullyear).ThemainreasonforthelackofasustainedriseinGDPfrom
thefiscalpackagesinvolvestherealinterestrateimplicationsofthefiscalstimulusasshown
inAppendixchartC.6.Theglobalnatureofthestimulusimpliesaspikeupinrealinterest
rateswhichpartlyoffsetthespikedowninthefirstyearoftheshocks.Notehoweverthat
26
higherrealinterestratespersistforupto6yearsafterthestimulus.Thissuggestssome
seriousproblemstobefacedbypolicymakersduringtherecoveryperiodfrom2010onwards.
Thefiscalpackagesalsohavesignificantimpactsonglobaltrade.Inthemodel,theeffectof
fiscalpolicyontradecomesinanumberofformsoperatingboththroughincomeandrelative
priceeffects.Ifaneconomyincreasedgovernmentspending,privateconsumptiontendsto
riseandshorttermincomerises.Howevertheincreasedborrowingtendstoincreasereal
interestrates,whichreducesprivateinvestment20. Thesetworesponseshaveopposite
effectsontrade. Inparticular,durablegoodsconsumptionfallsbecauseoftheriseinreal
interestrates,whilenondurablegoodsconsumption risesduetotheincomeincrease.The
effectisthatimportsofdurablegoodsfallandnondurablesrise.Inadditionthehigherreal
interestratetendstoattractforeign capitalwhichappreciatestherealexchangerateandtends
tocrowdoutexportsandstimulatesincomethroughrelativepricechanges.Acountryacting
alonehasasubstantialchangeinthemixofthecomponentsoffinaldemand.Henceif there
isaglobalfiscalstimulus,therealexchangerate(orrelativeprice)effectsaremuted.
Howeverbecauseallcountriesareactingtherealinterestrateeffectsareaccentuatedbecause
thecallonglobalsavingsismuchlargerthantheoutcomeofanyonecountryactingalone.
Chartset5.1showsaninterestingstorywhereexportsoftheindustrialeconomiestendtofall
asaresultofthefiscalpackage.Thisoccursforseveralreasons.Firstly,becausetheOECD
economieshaverelativelylargerfiscalpackages(apartfromChina),theirrealexchangerate
willtendtoappreciaterelativetothenonOECDeconomies,crowdingoutexports.
Secondly,theseeconomiestendtoexportmoredurablegoodswhosedemandisreducedbya
riseinglobalinterestrates.Thiseffectwasalsopresentintheglobalfinancialcrisis
simulationwheretheriskadjusteddiscountriserosesharply(eventhoughrealinterestrates
fell)andthedemandfordurablegoodscollapsed.
20 To the extent that there is a substantial supply response through infrastructure, the need for interest
%Deviation
.
2.0
1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
%Deviation
2.0
1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
%Deviation
2.0
1.0
0.0
1.0
2.0
3.0
4.0
5.0
%Deviation
%Deviation
6.0
GDP
GDP
GDP
GDP
Exports
Datasource:GCubedmodelsimulations
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
%Deviation
4.0
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
%Deviation
2.0
20
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
0.0
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
%Deviation
2.0
20
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
4.0
8.0
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
27
5.1GDPandexporteffectsoffiscalresponse
UnitedStates
Japan
1.0
1.0
0.0
2.0
3.0
4.0
Exports
GDP
UnitedKingdom
Exports
GDP
China
Exports
GDP
Australia
GDP
Exports
Germany
2.0
1.0
0.0
1.0
2.0
3.0
4.0
5.0
Exports
India
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2.0
4.0
Exports
OtherAsia
2.0
1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Exports
28
6. Conclusions
Thispaperhasexploredtheimpactofthreemajorshocksrepresentingtheglobalfinancial
crisisontheglobaleconomy.Forthecrisisitself threeshocksareneededtocapturethe
observeddropinassetpricesandreductionindemandandtrade.Itisnecessarytosimulate
theburstingofthehousingbubblecentredintheUnitedStatesandEurope,butextending
elsewhere,risingperceptionsofriskbybusinessasreflectedintheequityriskpremium over
bondsandrisingperceptionsofriskbyhouseholds. Thepaperhasalsoexploredthe
differencebetweenapermanentandatemporarylossofconfidence.
Thepolicyresponsehasbeen dramatic.Sotheanalysishasincludedamonetaryeasingacross
theglobeandafiscalstimulusofvaryingproportionsacrosscountriesandregions.
Simulatingtheeffectofthecrisisitself(thatisignoringthepolicyresponsesnotalreadybuilt
intothemodelsuchasendogenousmonetarypolicyrule)ontheUnitedStatesalone(the
epicentreofthecrisis)showsseveralthings.Hadtherenotbeenthecontagionacrossother
countriesintermsofriskreappraisal,theeffectswouldnothavebeen asdramatic.The
adversetradeeffectsfromtheUnitedStatesdownturnwouldhavebeenoffsettosomedegree
by positiveeffectsfromaglobalreallocationofcapital.WeretheUSaloneaffectedbythe
crisis,Chineseinvestmentcouldhaveactuallyrisen.Theworldcouldhaveescapedrecession.
WhenthereisareappraisalofriskeverywhereincludingChina,investmentfallssharply in
asensethereisnowhereforthecapitaltogoinaglobalcrisisofconfidence.Theimplication
isthatifmarkets,forecastersandpolicymakersmisunderstandtheeffectsofthecrisisand
mechanismsatwork,theycaninadvertentlyfuelfearsofameltdown andmakemattersfar
worse.
Theburstingofthehousingbubblehasabiggereffectonfallingconsumptionandimports
thandoesthereappraisalofrisk,butthereappraisalofriskhasthebiggesteffecton
investment.Risingriskcausesseveraleffects.Thecostofcapitalisnowhigherandleadstoa
contractioninthedesiredcapitalstock.Hencethereisdisinvestmentbybusinessandthiscan
goonforseveralyearsadeleveraginginthepopularbusinessmedia.Thehigherperception
ofriskbyhouseholdscausesthemtodiscountfuturelabourincomesandleadstohigher
savingsandlessconsumption,fuellingthedisinvestmentprocessbybusiness.
Whenthereisaglobalreappraisalofriskthereisalargecontractioninoutputandtrade the
scaleofwhichdependsonwhetherthecrisisisbelievedtobepermanentortemporary.The
longrunimplicationsforgrowthandtheoutlookfortheworldeconomyaredramatically
differentdependingonthedegreeofpersistenceoftheshock.Asexpected,theeffectsofthe
crisisaredeeperandlastlongerwhenthereappraisalofriskbybusinessandhouseholdsis
expectedtobepermanentversuswhereitisexpectedtobetemporary.Thisdifferenceanda
thirdscenariowhereagentsunexpectedlyswitchfromonescenariototheotherisexplored
inMcKibbinandStoeckel(2009b).Thedynamicsfor2010arequitedifferentbetweenthe
temporaryscenarioandtheexpectationrevisionscenarioeventhoughtheshocksareidentical
from2010onwards.
29
Thefiscalpolicyresponseinitiallyhasthedesiredeffectofincreasingdomesticdemandand
hencerealGDP.Whiletheboosttodomesticdemandonitsown boosts tradethereareother
effectsgoingon thathaveanadverseeffectontrade.Thefiscalstimulusandaccompanying
borrowing,causesrealinterestratestoriseoverwhattheywouldotherwisebeontopofthe
crisisthisisreturnofrealinterestratestobaselinelevels. Thiseffectwouldbedilutedifthe
globaleconomyremainedinrecessionforalongperiod.However, thenaturalrecovery from
theshocksasshownintheresultsimpliesthattherewillbecompetitionbygovernmentand
theprivatesectoroverscarcefundsforeitherprivateinvestmentortofinancefiscaldeficits.
Theriseinrealinterestrates(relativetowhattheywouldhavebeen)andfallininvestment
anddurablegooddemandimpliesthatexportsfall anddonotgetbacktobaselineforseveral
years.
AnotheraspectofthecrisisthatisexploredfurtherinMcKibbinandStoeckel(2009a)isthe
movetowardsrisingprotectionismresultingfromthelargecontractionsinglobaltrade. This
hasthepotentialtoworsentheconsequencesoftheglobalfinancialcrisis.
30
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31
AppendixA.Detailedresults
32
A.1Consumptioneffectsof apermanentversustemporaryGFC
2019
2020
2020
2017
2016
2015
2014
2013
2012
2018
2018
2017
2016
2015
2014
2013
20
20
20
18
20
16
20
14
20
12
8
20
0
permanent
temporary
OtherAsiaConsumption
1.000
temporary
Datasource:GCubedmodelsimulations
0.000
1.000
2.000
3.000
permanent
temporary
20
20
20
18
20
16
20
14
20
12
20
10
4.000
5.000
20
08
20
20
20
18
%Deviation
permanent
20
16
4
20
1
2
20
1
0
20
1
20
1
%Deviation
20
20
20
18
16
20
14
20
20
12
20
10
20
2.000
1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000
temporary
2.000
1.000
0.000
1.000
2.000
3.000
4.000
5.000
20
0
temporary
IndiaConsumption
2.000
0.000
2.000
4.000
6.000
8.000
10.000
08
%Deviation
2012
permanent
temporary
AustraliaConsumption
%Deviation
2011
2010
2009
2008
%Deviation
20
20
8
20
1
6
20
1
14
20
12
20
20
10
20
08
2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
ChinaConsumption
permanent
temporary
GermanyConsumption
2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
permanent
2011
permanent
2019
temporary
UnitedKingdomConsumption
%Deviation
2010
2008
%Deviation
8
20
20
20
1
20
16
14
20
20
12
20
10
permanent
1.500
1.000
0.500
0.000
0.500
1.000
1.500
2.000
2.500
2009
JapanConsumption
2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
20
08
%Deviation
UnitedStatesConsumption
33
C.2Tradebalanceeffectsof apermanentversustemporaryGFC
2019
2020
2018
2017
2016
2015
2014
2013
2012
2020
%GDPdeviation
1.500
1.000
0.500
2018
2017
2016
2015
2014
2013
2012
2011
20
20
20
18
20
16
20
14
20
12
8
20
0
permanent
temporary
OtherAsiaTradeBalance
temporary
Datasource:GCubedmodelsimulations
permanent
temporary
20
20
20
18
20
16
20
14
20
12
20
10
0.500
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
20
08
%GDPdeviation
20
20
20
18
20
16
4
20
1
2
20
1
0
20
1
20
1
%GDPdeviation
20
20
18
20
16
20
14
20
12
20
10
20
08
20
0.500
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
temporary
0.500
0.000
0.500
1.000
1.500
2.000
2.500
20
0
temporary
IndiaTradeBalance
AustraliaTradeBalance
permanent
2010
permanent
temporary
0.400
0.200
0.000
0.200
0.400
0.600
0.800
permanent
2009
0.000
0.500
2008
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
%GDPdeviation
GermanyTradeBalance
ChinaTradeBalance
%GDPdeviation
temporary
2.000
permanent
%GDPdeviation
2011
permanent
2019
temporary
UnitedKingdomTradeBalance
1.600
1.400
1.200
1.000
0.800
0.600
0.400
0.200
0.000
0.200
2010
2008
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
permanent
0.400
0.200
0.000
0.200
0.400
0.600
0.800
1.000
1.200
2009
JapanTradeBalance
%GDPdeviation
1.200
1.000
0.800
0.600
0.400
0.200
0.000
0.200
0.400
2008
%GDPdeviation
UnitedStatesTradeBalance
34
C.3Realinterestrateeffectsof apermanentversustemporaryGFC
JapanRealInterestRate
1.000
2.000
3.000
2019
2020
2020
2018
2017
2016
2015
2014
2013
2012
2019
2018
2017
2016
2015
2014
2013
permanent
20
20
20
18
20
16
20
14
20
12
20
0
5.000
temporary
OtherAsiaRealInterestRate
temporary
Datasource:GCubedmodelsimulations
1.000
0.000
1.000
2.000
3.000
permanent
temporary
20
20
20
18
20
16
20
14
20
12
20
10
4.000
5.000
20
08
%pointdeviation
20
20
20
18
20
16
4
20
1
2
20
1
0
20
1
2012
2.000
3.000
4.000
20
1
%pointdeviation
20
20
18
20
16
20
14
20
12
20
10
20
20
8
temporary
1.000
0.000
1.000
temporary
2.000
1.000
0.000
1.000
2.000
3.000
4.000
20
0
temporary
IndiaRealInterestRate
1.000
0.000
1.000
2.000
3.000
4.000
5.000
08
%pointdeviation
2011
permanent
temporary
AustraliaRealInterestRate
%pointdeviation
2010
2008
%pointdeviation
2020
2019
1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
ChinaRealInterestRate
permanent
2011
permanent
GermanyRealInterestRate
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
%pointdeviation
permanent
permanent
2010
2008
temporary
UnitedKingdomRealInterestRate
2.000
1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000
2009
4.000
5.000
2020
2019
2018
2017
0.000
1.000
2009
permanent
2016
2015
2014
2013
2012
2011
2010
2009
%pointdeviation
2.000
1.000
0.000
1.000
2.000
3.000
4.000
5.000
2008
%pointdeviation
UnitedStatesRealInterestRate
35
C.4Realeffectiveexchangerateeffectsof apermanentversustemporaryGFC
%Deviation
2019
2020
2020
2018
2017
2016
2019
2018
2017
2016
2015
2014
2013
1.500
1.000
0.500
0.000
20
20
20
18
20
14
20
16
temporary
OtherAsiaRealExchangeRate
temporary
Datasource:GCubedmodelsimulations
permanent
temporary
20
20
20
18
20
16
20
14
20
12
20
10
3.000
2.000
1.000
0.000
1.000
2.000
3.000
4.000
5.000
20
08
%Deviation
20
20
20
18
20
16
4
20
1
2
20
1
20
12
permanent
2.500
2.000
1.500
1.000
0.500
0.000
0.500
20
1
temporary
AustraliaRealExchangeRate
permanent
20
1
20
0
20
20
18
20
16
20
14
20
12
20
10
0.500
20
08
20
2012
2.000
permanent
temporary
IndiaRealExchangeRate
1.000
0.000
1.000
2.000
3.000
4.000
5.000
20
0
2011
permanent
temporary
ChinaRealExchangeRate
%Deviation
2010
4.000
2.000
0.000
2.000
4.000
6.000
8.000
10.000
2008
%Deviation
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2008
2009
%Deviation
2.000
3.000
4.000
5.000
%Deviation
temporary
GermanyRealExchangeRate
1.000
0.000
1.000
permanent
2015
permanent
UnitedKingdomRealExchangeRate
6.000
2014
20
20
temporary
2009
permanent
20
1
20
16
14
20
20
12
20
10
20
08
25.000
2013
20.000
2012
15.000
2011
5.000
10.000
2.000
1.500
1.000
0.500
0.000
0.500
1.000
1.500
2.000
2.500
2008
0.000
%Deviation
%Deviation
5.000
2010
JapanRealExchangeRate
2009
UnitedStatesRealExchangeRate
15.0
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
10.0
5.0
0.0
5.0
5.0
10.0
Datasource:GCubedmodelsimulations
20.0
2019
2020
2020
2020
2016
2020
2015
2014
2013
2019
2015
2014
2012
2011
2010
2009
2019
15.0
2018
10.0
2019
0.0
2017
5.0
2018
OtherAsiaInvestment
2018
6.0
2018
4.0
2016
0.0
2017
2.0
2017
2.0
2017
IndiaInvestment
2016
2015
2014
2013
2013
2012
2011
GermanyInvestment
2016
2015
AustraliaInvestment
2014
8.0
2013
ChinaInvestment
2012
8.0
2012
6.0
2011
4.0
2011
0.0
8.0
6.0
4.0
2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2010
UnitedKingdomInvestment
2010
2.0
2008
UnitedStatesInvestment
2010
4.0
2009
10.0
2008
%Deviation
0.0
2009
2.0
%Deviation
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
5.0
2009
%Deviation
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2008
%Deviation
5.0
6.0
4.0
2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2008
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2009
2008
%Deviation
10.0
2008
10.0
%Deviation
4.0
2.0
0.0
2.0
4.0
6.0
8.0
10.0
2008
10.0
2009
%Deviation
15.0
2008
%Deviation
36
C.5Investmenteffectsoffiscalresponse
JapanInvestment
%pointdeviation
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
%pointdeviation
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.5
2009
Datasource:GCubedmodelsimulations
0.2
AustraliaRealInterestRate
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.5
2017
2018
2019
2020
2019
2020
2016
2015
2018
OtherAsiaRealInterestRate
2017
2016
ChinaRealInterestRate
2014
0.0
2015
0.5
2013
0.5
2014
1.0
2012
1.5
2013
2.5
2011
UnitedKingdomRealInterestRate
2012
0.5
2010
0.0
2011
0.5
2009
1.0
2010
2.5
2008
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
3.0
2.5
%pointdeviation
1.5
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
2.0
%pointdeviation
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
%pointdeviation
2.0
20
%pointdeviation
UnitedStatesRealInterestRate
2009
%pointdeviation
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
3.0
2008
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.5
2008
%pointdeviation
37
C.6Realinterestrateeffectsoffiscalresponse
JapanRealInterestRate
2.0
1.5
1.0
0.5
0.5
0.0
GermanyRealInterestRate
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.5
IndiaRealInterestRate
1.0
0.8
0.6
0.4
0.2
0.0
0.4
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
0.0
0.2
Datasource:GCubedmodelsimulations
0.5
2016
2015
2014
2013
2012
2020
0.0
2019
0.5
2020
1.0
2018
1.5
2019
2.0
2017
2.5
2018
OtherAsiaTradeBalance
2017
2016
0.2
2015
0.4
2014
AustraliaTradeBalance
2013
ChinaTradeBalance
2011
UnitedKingdomTradeBalance
2012
0.5
2010
0.5
2011
0.4
2009
UnitedStatesTradeBalance
2010
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
0.3
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
0.2
%GDPDeviation
0.0
20
0.1
0.1
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.4
%GDPDeviation
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
%GDPDeviation
0.1
2008
%GDPDeviation
%GDPDeviation
0.1
2009
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
0.2
2008
0.6
%GDPDeviation
%GDPDeviation
0.4
0.2
0.0
0.2
0.4
0.6
0.8
1.0
2008
%GDPDeviation
38
C.7Tradebalanceeffectsoffiscalresponse
JapanTradeBalance
0.1
0.1
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
GermanyTradeBalance
0.2
0.2
0.0
0.4
0.6
0.8
1.0
IndiaTradeBalance
2.0
1.5
1.0
0.5
0.0
39
C.8Realeffectiveexchangerateeffectsoffiscalresponse
JapanRealEffectiveExchangeRate
8.0
1.0
6.0
0.5
%Deviation
4.0
2.0
0.0
0.0
0.5
4.0
1.5
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
1.0
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
2.0
UnitedKingdomRealEffectiveExchangeRate
GermanyRealEffectiveExchangeRate
1.0
0.6
0.4
0.2
0.0
20
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
0.2
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.5
1.0
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
%Deviation
Datasource:GCubedmodelsimulations
2019
2020
2020
2018
2019
2017
2016
2015
2014
0.0
0.5
1.0
2018
2017
2016
2015
2014
2013
2012
2.0
2011
1.5
2010
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
%Deviation
0.5
2008
%Deviation
2013
OtherLDCRealEffectiveExchangeRate
LatinAmericaRealEffectiveExchangeRate
0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2012
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
0.0
0.5
2011
0.5
2010
1.0
0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
2009
%Deviation
1.5
2008
%Deviation
2.0
2008
IndiaRealEffectiveExchangeRate
ChinaRealEffectiveExchangeRate
2009
%Deviation
0.8
2008
%Deviation
UnitedStatesRealEffectiveExchangeRate
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