EXAM Roland

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Roland PASQUIER
15/02/2018
		
INTERNATIONAL MACROECONOMICS
FINAL EXAM
Download and read Chapter 2 of the latest OECD economic outlook report available at the following link: 
http://www.oecd.org/eco/outlook/Using-the-fiscal-levers-to-escape-the-low-growth-trap.pdf 
Break down your assignment in 2 sections: 
Describe the global macroeconomic policy recommendation of the OECD? (2 pages).
To what extent do the models presented in class help you understand this policy recommendation? (1 page)
A fiscal policy to counter the crisis effects:
After the crisis, the context of countries of OECD is problematic. The growth is low, the investments are weak and the inequalities are rising. The debt observed in most of the countries is quite high. Public spending has decrease in a important number of areas needed for long term growth. After a cautious study of the situations of each country, the OECD has designed recommendations and guidelines for the group of countries to follow. 
A fiscal policy is needed but it should be settled in accordance with each country’s situation. This fiscal policy could be finance through a public deficit in the short term. The deficit will then turn neutral after a few years. This policy concretely will result in government spending (infrasctrures, education) or reducing taxes. 
The reasons for a fiscal policy in this period: 
The first reason to set up a policy of this type in the actual moment is that the fiscal context is favorable for several factors. 
The interest rates on government debt are really low right now in advanced economies but also in emerging markets. The governments have settled a lot of measures in order to limit the public debt in order to keep the market in a good situation. Thus, the states are not in a full debt capacity and can increase their public deficit more than the actual situation without deep risks. The long term measures that governments has taken in the past and that were involving a lot of money can be paid more easily now with the low interest rates. The budget available will be higher due to the savings realized with the new interest rates. Some structural reforms also created a fiscal space by increasing the public budget. This is realized by governments through changing the organization of spendings (healthcare, pensions) and taxes. 
A fiscal policy will have effect on the long term growth of the OECD members. Firstly, the OECD countries have enough reserves to finance the operations on the short term. The sustainability of the program will be assure by the gain of GDP that will occurs and that will increase through the years. These benefits will arrive as fast as the first year of application. In the long term, the benefits of the policy could increase to raise as much as 2% of the GDP. This policy will also increase the development of strategic areas for long term growth such as education, health, research or green infrastructure. 
Outside of OCED, big countries like China and India also target fiscal policies. Indeed, China has needs for social safety in its population and will increase government spendings. This will increase the demand and the growth of the country. In India, the public budget has increase due to higher taxes applied on the population and to a better management of its public spendings. 
A need for reforms and cooperation:
In order to obtain the maximum of this fiscal policy, the government of each countries have to create some reforms in order to organize the fiscal policy inside the countries and to assure its functioning on the long term. Even more important is the need for cooperation. The different countries have to coordinate their policies in order to positively influence each other. The benefits of this cooperation are significant and add around 0.2% more growth each year. 
A policy adapted to every country:
The policy will however have different results according to the country and the good results above can be limited in some of them. Some doubts about the gains of Japan has to be underlined. For other countries like France or Italy, the policy could increase the weak demand and give a fitted solution for their economy. 
Each country need a particular type of fiscal policy. The spending of the government has to be targeted in the right area and it has to be prioritize according to the real needs of each country (education, healthcare). The weak points of each members has to be targeted in order to aim at long term growth. 
In the OCED members, one country out of three should put more intensity in its fiscal policy according to the OCED report. The intensity of the fiscal policy have also to be set depending on each country. Germany has a high need of public investment and should increase more government spending in its fiscal policy. UK, which suffered from a low growth and economic difficulties as a consequence of the Brexit. Other countries like Japan can limit the expenses of the fiscal policy when they get to the neutral point of their public balance. 
The theories behind this fiscal policy:
One of the main theory behind the fiscal policy proposed is the fact that an expansionary policy will lead to an increase in domestic demand and thus in an increase in GDP. Reducing taxes or increasing government spendings have the same impacts as they are used to raise the demand. However, if this expansionary policy is run only in one country, the GDP of the country will increase but it will have a cost. As a consequence, the trade deficit will increase and so will the public debt of the country. 
The only way to obtain both an increase in GDP and have its benefits but also to avoid a trade deficit is to have an expansionary policy in the other countries. This will have benefits for all the country of OCED as they will all experience an increase in GDP and the trade balances will still be good. The trade balances will be good because the imports of all OCED country will increase and as they mainly trade between them, their exports will increase as well. This results require a lot of international cooperation and coordination. The countries have to be able to rely on each other and they all have to respect the fiscal policy. They should all agree on the time and the intensity of the fiscal policy of each states and the amount of money invested should be calculated precisely. 
If the government of a country is alone to run an expansionary policy, its trade balance will quickly be negative as the trade balances of the other countries will increase. It can create a context of fear where nobody wants to run an expansionary policy, which is needed to put the economy on the right path. Every country is scarred that its trade balance go negative so nobody does anything. This is called the prisonners dilemma. It creates a vicious circle where no public decisions (on public spendings or taxes) are taken in order to improve the economy and so the global economic context keeps getting worse. 
The fiscal policy explain above is a policy with both short term and long term goals. In the short term, the GDP will increase, increasing employment and stimulating the private sector. These result can be already observed in the first years. But in the long run, the investments made in order to increase the capacity of the countries to innovate (education, research, healthcare) will lead to a better economic situation in the future. 
However, we can observe that one third of the OCED countries are reluctant to put in place a fiscal policy in an efficient and more intensive way by increasing more public spending or decreasing more taxes. This is the consequence of the important level of public debts of most countries inside the OECD.