Crisis

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Discussion of the Recent Financial Crisis & Other Recent Events

MACROECONOMICS
Macroeconomics Prof. N. Gregory MankiwRudra SensarmaKozhikode Indian Institute of Management

PowerPoint Slides by Ron Cronovich
© 2013 Worth Publishers, all rights reserved

www.rudrasensarma.info ®

Learning objectives & outcomes Macroeconomic implications of: Japan’s prospective PM and his plans The Eurozone mess and a Greek default The Global crisis and macroeconomic policy

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Shinzo Abe’s plans for Japan
Shinzo Abe is widely expected to become PM of Japan in 2013 Japan’s debt is managed by the Ministry of Finance (MoF) by selling bonds directly to investors Abe has suggested that the Bank of Japan (BoJ) monetize the government’s deficit

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BRAINSTORM Implications for the domestic economy
Why has are financial markets concerned?

Why will it require the BoJ’s inflation target to be raised?

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BRAINSTORM Implications for the Yen
What will the monetization programme mean for the Yen? Will it help GDP growth? What will the revaluation of Yen mean for interest rates that Japan pays on its external debt? How will the higher inflation affect foreign investment? The policy may work if Yen falls but not by too much CHAPTER 11

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Greece and the Euro crisis
Europe has long dreamt of unification to strengthen trade & financial flows (to challenge the might of the dollar or strengthen Germany’s position within Europe or to end wars?) The common Euro currency was introduced in 2002 CHAPTER 11

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BRAINSTORM

Greece and the Euro crisis
How does a common currency help? European central bank was established to set interest rate (the official repo rate) to target inflation at 2% Pre-conditions for joining included low govt deficit, low debt, low inflation, low interest rate, stable exchange rate How did it benefit Greece? Why did Greece lose its export competitiveness? CHAPTER 11

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Weaknesses of the treaty
No conditions for continuing, no criteria for exiting Monetary union without a fiscal union Absence of common or coordinated fiscal policy meant that PIGS governments generated deficits CHAPTER 11

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Government debt in 2006 and 2011
180 160 140

2006 2011

percent of GDP

120 100 80 60 40 20 0 Germany Spain Greece Ireland Italy Portugal 8

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Interest rates on ten-year bonds
30 25 20

percent

15 10 5 0

Germany Ireland Greece Spain Italy Portugal

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BRAINSTORM

Euro crisis and future outlook
What triggered the crisis? What might Greece have done if not for the EU? What options has EU & Greece tried? Why these options have not worked? Will a default help or hurt? Implications for emerging countries like India?

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NEXT (LAST) STEPS
Project submission on Sunday by 5 pm (full report, short report, excel files, powerpoint file, reflective log) all in soft copy and hard copy (except excel file). Presentations on 17th Dec, 18th Dec, 20th Dec, 21st Dec, 27th Dec (in the order of groups 10, 9, …., 1) 2 groups to present (15 min per presentation) in each session followed by Q&As (questions will be asked by 2 randomly selected groups) Review & feedback session on 28th Dec (summary of the course, feedback on projects, 3rd quiz, midterm & advice for end-term) End term exams during 31st Dec – 4th Jan CHAPTER 11

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Appendix Global financial crisis
The “Great Moderation” - years of macro stability Low inflation Low interest rates Steady growth Global savings glut Development of complex financial assets Mispricing of risk High leverage Defaults on sub-prime loans acted as the trigger CHAPTER 11

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COMMON FEATURES OF FINANCIAL CRISES

1. Asset-Price...
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