macroeconomics slides 10th lecture · macroeconomics slides10thlecture luisreyes1 panthéon...

MacroeconomicsSlides 10th lecture

Luis REYES1

Panthéon Sorbonne Master in Economics, Université Paris 1

[email protected], www.luisreyesortiz.orgL. Reyes (Paris 1) Macro 10 11/28/2018 1 / 29

Outline

1 From the Bretton Woods system to the oil shocks

2 The "Great Moderation"Some (deep) structural changesThe consequences for householdsThe consequences for firms

3 Other "minor" issuesPublic expenditure and income inequality

L. Reyes (Paris 1) Macro 10 11/28/2018 2 / 29

Outline





From Bretton Woods to the oil shocksBretton Woods broad overview

The Bretton Woods system (1945-1971) was characterized by (amongothers):

fixed exchange rates,strong intervention by central banks,capital controls,high inflation,low unemployment rates,high levels of government expenditure,low public debt/GDP ratios,and overall social and economic stability, despite some importantdemonstrations in the sixties.




fixed exchange rates,

strong intervention by central banks,capital controls,high inflation,low unemployment rates,high levels of government expenditure,low public debt/GDP ratios,and overall social and economic stability, despite some importantdemonstrations in the sixties.




fixed exchange rates,strong intervention by central banks,

capital controls,high inflation,low unemployment rates,high levels of government expenditure,low public debt/GDP ratios,and overall social and economic stability, despite some importantdemonstrations in the sixties.




fixed exchange rates,strong intervention by central banks,capital controls,

high inflation,low unemployment rates,high levels of government expenditure,low public debt/GDP ratios,and overall social and economic stability, despite some importantdemonstrations in the sixties.




fixed exchange rates,strong intervention by central banks,capital controls,high inflation,

low unemployment rates,high levels of government expenditure,low public debt/GDP ratios,and overall social and economic stability, despite some importantdemonstrations in the sixties.




fixed exchange rates,strong intervention by central banks,capital controls,high inflation,low unemployment rates,

high levels of government expenditure,low public debt/GDP ratios,and overall social and economic stability, despite some importantdemonstrations in the sixties.




fixed exchange rates,strong intervention by central banks,capital controls,high inflation,low unemployment rates,high levels of government expenditure,

low public debt/GDP ratios,and overall social and economic stability, despite some importantdemonstrations in the sixties.




fixed exchange rates,strong intervention by central banks,capital controls,high inflation,low unemployment rates,high levels of government expenditure,low public debt/GDP ratios,

and overall social and economic stability, despite some importantdemonstrations in the sixties.




fixed exchange rates,strong intervention by central banks,capital controls,high inflation,low unemployment rates,high levels of government expenditure,low public debt/GDP ratios,and overall social and economic stability, despite some importantdemonstrations in the sixties.


From Bretton Woods to the oil shocksPerfect does not exist

Despite all this relative progress, not everybody was comfortable withthis system.

"What started as a small, short-term credit facility grew to be a large,intermediate-term facility until the US gold window closed in August1971" (Sandra Kollen, Federal Reserve of Atlanta)."By the early 1960s, the U.S. dollar’s fixed value against gold, underthe Bretton Woods system of fixed exchange rates, was seen asovervalued" (IMF)."The principal causes of America’s recent trade deterioration are tobe found (...) in the high value of the dollar in foreign exchangemarkets" (Arthur Burns; Foreign Affairs, 1984).


http://www.federalreservehistory.org/Events/DetailView/33

http://www.imf.org/external/about/histend.htm


Despite all this relative progress, not everybody was comfortable withthis system."What started as a small, short-term credit facility grew to be a large,intermediate-term facility until the US gold window closed in August1971" (Sandra Kollen, Federal Reserve of Atlanta).

"By the early 1960s, the U.S. dollar’s fixed value against gold, underthe Bretton Woods system of fixed exchange rates, was seen asovervalued" (IMF)."The principal causes of America’s recent trade deterioration are tobe found (...) in the high value of the dollar in foreign exchangemarkets" (Arthur Burns; Foreign Affairs, 1984).





Despite all this relative progress, not everybody was comfortable withthis system."What started as a small, short-term credit facility grew to be a large,intermediate-term facility until the US gold window closed in August1971" (Sandra Kollen, Federal Reserve of Atlanta)."By the early 1960s, the U.S. dollar’s fixed value against gold, underthe Bretton Woods system of fixed exchange rates, was seen asovervalued" (IMF).

"The principal causes of America’s recent trade deterioration are tobe found (...) in the high value of the dollar in foreign exchangemarkets" (Arthur Burns; Foreign Affairs, 1984).





Despite all this relative progress, not everybody was comfortable withthis system."What started as a small, short-term credit facility grew to be a large,intermediate-term facility until the US gold window closed in August1971" (Sandra Kollen, Federal Reserve of Atlanta)."By the early 1960s, the U.S. dollar’s fixed value against gold, underthe Bretton Woods system of fixed exchange rates, was seen asovervalued" (IMF)."The principal causes of America’s recent trade deterioration are tobe found (...) in the high value of the dollar in foreign exchangemarkets" (Arthur Burns; Foreign Affairs, 1984).




From Bretton Woods to the oil shocksBretton Woods collapse

In 1971, Richard Nixon announced the closing of the gold window,abruptly ending the Bretton Woods system.

"In September 1971, a month after Nixon’s speech, at an OPECmeeting in Beirut, its member states increased oil prices by nearly 9percent explicitly to compensate for the devaluation of the U.S.currency" (Graetz, 2011).Despite some measures implemented to control prices, inflationaggravated.The second half of the seventies was characterized by what came tobe known as "stagflation".



In 1971, Richard Nixon announced the closing of the gold window,abruptly ending the Bretton Woods system."In September 1971, a month after Nixon’s speech, at an OPECmeeting in Beirut, its member states increased oil prices by nearly 9percent explicitly to compensate for the devaluation of the U.S.currency" (Graetz, 2011).

Despite some measures implemented to control prices, inflationaggravated.The second half of the seventies was characterized by what came tobe known as "stagflation".



In 1971, Richard Nixon announced the closing of the gold window,abruptly ending the Bretton Woods system."In September 1971, a month after Nixon’s speech, at an OPECmeeting in Beirut, its member states increased oil prices by nearly 9percent explicitly to compensate for the devaluation of the U.S.currency" (Graetz, 2011).Despite some measures implemented to control prices, inflationaggravated.

The second half of the seventies was characterized by what came tobe known as "stagflation".



In 1971, Richard Nixon announced the closing of the gold window,abruptly ending the Bretton Woods system."In September 1971, a month after Nixon’s speech, at an OPECmeeting in Beirut, its member states increased oil prices by nearly 9percent explicitly to compensate for the devaluation of the U.S.currency" (Graetz, 2011).Despite some measures implemented to control prices, inflationaggravated.The second half of the seventies was characterized by what came tobe known as "stagflation".


Outline





The end of stagflation, and the beginning of the calvaryThe end of stagflation (1)

In 1979, the Fed’s newly elected chairman Paul Volcker raised interestrates strongly.

In order to avoid capital flight, France and several other (mostlywestern) economies were forced to follow suit.With interest rates at high levels, and despite the celebratedstabilization of inflation, seven main consequences emerged.These had an important determining impact on the currentinternational economic configuration.In no particular order of importance, these are the following:



In 1979, the Fed’s newly elected chairman Paul Volcker raised interestrates strongly.In order to avoid capital flight, France and several other (mostlywestern) economies were forced to follow suit.

With interest rates at high levels, and despite the celebratedstabilization of inflation, seven main consequences emerged.These had an important determining impact on the currentinternational economic configuration.In no particular order of importance, these are the following:



In 1979, the Fed’s newly elected chairman Paul Volcker raised interestrates strongly.In order to avoid capital flight, France and several other (mostlywestern) economies were forced to follow suit.With interest rates at high levels, and despite the celebratedstabilization of inflation, seven main consequences emerged.

These had an important determining impact on the currentinternational economic configuration.In no particular order of importance, these are the following:



In 1979, the Fed’s newly elected chairman Paul Volcker raised interestrates strongly.In order to avoid capital flight, France and several other (mostlywestern) economies were forced to follow suit.With interest rates at high levels, and despite the celebratedstabilization of inflation, seven main consequences emerged.These had an important determining impact on the currentinternational economic configuration.

In no particular order of importance, these are the following:



In 1979, the Fed’s newly elected chairman Paul Volcker raised interestrates strongly.In order to avoid capital flight, France and several other (mostlywestern) economies were forced to follow suit.With interest rates at high levels, and despite the celebratedstabilization of inflation, seven main consequences emerged.These had an important determining impact on the currentinternational economic configuration.In no particular order of importance, these are the following:


Outline






1 The shift from a regime that favors employment to another that ismore fond of price stability (the ’Great Moderation’),

2 The change in the capital structure of some developed economies’firms (Financial Fragility Hypothesis),

3 The strong rise in household indebtedness (two major housing crisesand accrued predatory lending behavior of banks),

4 Currency crises in Latin America in the early 1980s and its sequels(Dependency Theory),

5 The creation and consolidation of a new international superpower(China),

6 The collapse of the Soviet Union (end of the Cold War),7 The growing dependency of the U.S. economy with respect to oil

(’peacekeeping’ interventions in the Middle East).








6 The collapse of the Soviet Union (end of the Cold War),

7 The growing dependency of the U.S. economy with respect to oil(’peacekeeping’ interventions in the Middle East).








6 The collapse of the Soviet Union (end of the Cold War),7 The growing dependency of the U.S. economy with respect to oil

(’peacekeeping’ interventions in the Middle East).


The real interest rateFinancial institutions


Outline





The end of stagflation, and the beginning of the calvaryThe consequences for French households (1)

With the strong increase of interest rates, and the corresponding fallin the demand for credit by firms, banks granted easier access ofcredit to households.

With the relative fall of the real interest rate paid by households (2ndhalf of the 80s), their demand for credit increased strongly.This in turn implied:

1 high demand for real estate and correspondingly high property prices(i.e. two major real estate bubbles),

2 rising shares of debt as proportion of disposable income, and all thiswas coupled with

3 higher unemployment rates and greater labor market flexibility (higherprofit rates at the expense of lower wage/GDP ratios, reduced benefitsand higher contributions paid by workers, etc.).



With the strong increase of interest rates, and the corresponding fallin the demand for credit by firms, banks granted easier access ofcredit to households.With the relative fall of the real interest rate paid by households (2ndhalf of the 80s), their demand for credit increased strongly.

This in turn implied:






With the strong increase of interest rates, and the corresponding fallin the demand for credit by firms, banks granted easier access ofcredit to households.With the relative fall of the real interest rate paid by households (2ndhalf of the 80s), their demand for credit increased strongly.This in turn implied:





Labor shareHouseholds wage income as share of aggregate income


Household debtDebt as share of wealth and the real interest rate


Prices of household non-financial assetsProduced and non-produced non-financial assets


Outline





The end of stagflation, and the beginning of the calvaryThe consequences for firms (1)

Since credit became more expensive (both because interest rates roseand inflation was controlled), firms issued more equities than debt.

As a consequence, business executives became more estranged fromcentral bank command and lobbied for deregulation in financialmarkets.The economy fell into a liquidity trap.With major borrowers (i.e. NFCs) demanding less credit, lenders (i.e.banks) had a strong urge in becoming market makers and findcustomers where there were formerly no potential gains (i.e.households and developing economies), thus creating new sources ofinstability.



Since credit became more expensive (both because interest rates roseand inflation was controlled), firms issued more equities than debt.As a consequence, business executives became more estranged fromcentral bank command and lobbied for deregulation in financialmarkets.

The economy fell into a liquidity trap.With major borrowers (i.e. NFCs) demanding less credit, lenders (i.e.banks) had a strong urge in becoming market makers and findcustomers where there were formerly no potential gains (i.e.households and developing economies), thus creating new sources ofinstability.



Since credit became more expensive (both because interest rates roseand inflation was controlled), firms issued more equities than debt.As a consequence, business executives became more estranged fromcentral bank command and lobbied for deregulation in financialmarkets.The economy fell into a liquidity trap.

With major borrowers (i.e. NFCs) demanding less credit, lenders (i.e.banks) had a strong urge in becoming market makers and findcustomers where there were formerly no potential gains (i.e.households and developing economies), thus creating new sources ofinstability.



Since credit became more expensive (both because interest rates roseand inflation was controlled), firms issued more equities than debt.As a consequence, business executives became more estranged fromcentral bank command and lobbied for deregulation in financialmarkets.The economy fell into a liquidity trap.With major borrowers (i.e. NFCs) demanding less credit, lenders (i.e.banks) had a strong urge in becoming market makers and findcustomers where there were formerly no potential gains (i.e.households and developing economies), thus creating new sources ofinstability.



Since firms were no longer being subject to the pressure of banks toinvest in safer-though-less-profitable projects, investment tends totake place in riskier sectors, thus promoting even more risk-taking(i.e. issuing more equities at higher prices).

As a consequence, since riskier investment projects tend to be lesslabor-intensive than less-risky projects, labor demand diminished, thusaggravating (and even perpetuating) the unemployment problem.Given that the nature of riskier projects tends to be unproductive (forinstance, advertising), new creation of wealth tends to be slower thanit would otherwise be.



Since firms were no longer being subject to the pressure of banks toinvest in safer-though-less-profitable projects, investment tends totake place in riskier sectors, thus promoting even more risk-taking(i.e. issuing more equities at higher prices).As a consequence, since riskier investment projects tend to be lesslabor-intensive than less-risky projects, labor demand diminished, thusaggravating (and even perpetuating) the unemployment problem.

Given that the nature of riskier projects tends to be unproductive (forinstance, advertising), new creation of wealth tends to be slower thanit would otherwise be.



Since firms were no longer being subject to the pressure of banks toinvest in safer-though-less-profitable projects, investment tends totake place in riskier sectors, thus promoting even more risk-taking(i.e. issuing more equities at higher prices).As a consequence, since riskier investment projects tend to be lesslabor-intensive than less-risky projects, labor demand diminished, thusaggravating (and even perpetuating) the unemployment problem.Given that the nature of riskier projects tends to be unproductive (forinstance, advertising), new creation of wealth tends to be slower thanit would otherwise be.


Profit rateNon-financial firms’ profit rate


Capital structure of non-financial firmsNon-financial firms’ debt as share of total liabilities (stocks)


Accumulation of non-financial firmsNon-financial firms’ accumulation of equity and non-financial assets


Outline





From the liquidity trap to the crisisThe crisis

The housing bubble is likely to have been fed by, at least, two majorlong-term trends:

1 the sharp increase in households’ indebtedness, and2 the strong degradation in households’ living standards (wage

contraction and rise in unemployment, mainly).In turn, throughout the same period the stock-market bubble grewthanks to the bull market that accompanied the massive issuance ofequities created by:

1 movements in interest rates, and2 the falling from grace of credit demand by firms (both of which were

mutually reinforcing).

With the collapse of Lehman Brothers in the U.S. came the signal ofthe worldwide bubble burst of both markets.




1 the sharp increase in households’ indebtedness, and

2 the strong degradation in households’ living standards (wagecontraction and rise in unemployment, mainly).

In turn, throughout the same period the stock-market bubble grewthanks to the bull market that accompanied the massive issuance ofequities created by:








contraction and rise in unemployment, mainly).

In turn, throughout the same period the stock-market bubble grewthanks to the bull market that accompanied the massive issuance ofequities created by:










mutually reinforcing).With the collapse of Lehman Brothers in the U.S. came the signal ofthe worldwide bubble burst of both markets.






1 movements in interest rates, and

2 the falling from grace of credit demand by firms (both of which weremutually reinforcing).








mutually reinforcing).With the collapse of Lehman Brothers in the U.S. came the signal ofthe worldwide bubble burst of both markets.


Outline





Public expenditureCurrent and investment expenditure


Public debt and the interest rate


Inequalities

What about inequalities? Click here


http://wid.world/

Last slide

End of the tenth lecture.


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