Final EXAM Felipe

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International Macroeconomics
Felipe Ewerton DE OLIVEIRA RODRIGUES
Final Exam
Question 1: Describe the global macroeconomic policy recommendation of the OECD? (2 pages).
The recommendations are guidelines with initiatives to help the countries to escape from the low-growth trap, considering the situation of which OECD country. Those guidelines aim to emphases fiscal initiative, comprising of spending or tax measures, to improve productivity in the medium to long term. 
The main idea is to decrease interest rates to increase the fiscal space, which has happened in advanced economies. Low interest rates make easier for the government control better its budget and increase the fiscal space, it also increases savings on interest costs of the government. Also, lower interest rates reduce the risks that the government faces to roll over its debts. Moreover, an alternative way to look at fiscal space is to focus on long-term sustainability and compute the maximum primary surplus countries can accumulate, given their projected spending. Finally, the recommendation also involves structural reforms and global cooperation and coordination. 
Fiscal initiatives to catalyze long-term growth and inclusiveness
A larger fiscal space makes possible to invest more in programs which could include high-quality spending on education, health and research and development as well as green infrastructure that all bring significant output gains in the long run and foster inclusiveness. Those investments increase the productivity of the country which catalyze either the aggregate supply and the aggregate demand because it also decreases unemployment rates. 
However, one of the concern is the fact that the impacts will vary and are different over the time and many factors can influence the growth impact of a fiscal initiative. In the short run, those factors are: collective action and deficit-financing can influence the growth impact. Whereas, in the long run, those factors are: structural reforms; long-term unemployment; and return on public capital. In which country, those factors affect the results differently. 
Furthermore, this productivity-enhancing fiscal initiative can be financed temporarily by issuing debt, but with different horizons, for example, Finland can finance a permanent ½ per cent of GDP fiscal initiative though the increase of its deficit for 2 years, while Ireland can do it for 6 years.
Moreover, a productivity-enhancing fiscal initiative has either a short-term demand effect and a long-term supply effect, in contrast of just boosting current public expenditure. In the short-term, more productivity means less costs and decrease of prices which increase demand. Whereas, in long-term, companies will be able to increase their production to following the increase in demand. 
Additionally, share the benefits of public investment with the entire population reach larger growths. These gains are particularly more effective in areas associated with large externalities, such as health, education and research and development. Specially if spending is directed focused on basic research where widespread market failures lead to under-investment by the private sector. The results and benefits from those investments also improve the ability of economies to learn from innovations at the global frontier, leading to larger growth gains by raising skills and productivity.
Finally, those long-term improvement initiatives have a different impact in comparison to just increase the government expenditures to stimulate demand, which can also lead to an increase in inflation and reduction of the exchange rate, and hence a reduction in the reliability of government. This reliable image is particularly a key factor to enhance the effective public governance, leading to a more successful fiscal initiative. Additionally, this reliability is also a result of respect for the rule of law, quality regulation, transparency, openness and integrity.
Structural reforms to enhance the growth impact of the fiscal initiative
Structural reforms lead to an improve in total factor productivity and potential production. Those reforms should target a broad range of reform objectives, such as market competition, workforce mobility and financial market competitiveness, which are keys components to enhance productivity and improve inclusiveness.
Furthermore, other factors as high long-term unemployment reinforces that productivity-enhancing through fiscal initiative is essential in the current environment, which is characterized a low-growth trap with weak demand investment, productivity and trade. 
Finally, those structural reforms also include an improvement in the tax and spending mix by focusing on the measures which will enhance long-term growth and promote inclusiveness and the protection of the environment. Efficient spending has
a permanent effect on the supply side of the economy, while unproductive spending is not sustainable. Then, the tax structure can be modified to support inclusive and sustainable growth. The composition of the fiscal initiative is thus essential for fiscal expansion to be undertaken without increasing the debt-to-GDP ratio in the long run.
Global Coordination and cooperativeness to achieve better results
In order to maximize fiscal policy initiatives, countries need to define mechanisms of cooperation to guarantee a positive interaction, which should produce mutual benefits. Moreover, each country should make use of its increased in fiscal space to significantly increase high-quality public investment or spending on health or education and factors related to an improvement in productivity. 
Those initiatives lead to a mutual growth of productivity and aggregate demand in all countries, which generate benefits for all countries, since that they will share their growth among other countries via importations and exportation. Hence, all countries will be able to increase without deal with elevated trade deficit.
Finally, each country has different particularities which request different uses of the increase in fiscal space, but even in these cases is important to maintain the global cooperation and coordination. In the data presented about European and North American countries, collective actions always releveled to be more efficient to improve high-quality public investment is key to multiplier the fiscal policy effects in each country, bringing additional output gains and a higher GDP level. 
Question 2: To what extent do the models presented in class help you understand this policy recommendation? (1 page)
The models presented in class help me to understand the logic behind all recommendation and the relation between the changeable factors, which makes me perceive how the interactions among the macroeconomics factors can produce positive results for countries along the time and recovery countries for crises periods.
Undoubtedly, a seek for improvement in productivity was one of the most key factors mentioned among all recommendation. Instead of just recommend the government to increase its expenditures to catalyze the economy producing an increase in the GDP by multiplier effect in the short-run, they highly recommended investments to enhance productivity, which is a key factor to improve aggregated supply in the long-term, increase the exchange rate and increase income. Investments in education, technology and infrastructure are essential to maintain a sustainable national growth.
Additionally, the theory behind the interest rate makes me understand the effect of lower or higher interest rate, a lower interest rate allows an improvement in investments and an emergence of a fiscal space. It allows the government to control better its expenditures. Lower interest rates make the access to the money easier, which leads to higher inflation, but if this capital is used to invest in sustainable actions and structural reforms, the country is going to growth along the time, increasing eitheraggregate supply and aggregate demand, leading to a healthy GDP growth.
Another important lesson that I could draw was the importance of maintain a reliable image of the government, by controlling government expenditures, inflation and the power of the currency. It has an impact in either consumers and investors’ confidence to invest and consume more in order to make the GDP growth.
Furthermore, I could understand the importance of having a coordinated and cooperative global initiatives, which produces more benefits by sharing growth among countries. The game theory taught in the course help to realize that if all countries defined to invest, the overall result is going to be better, but if some ones do not cooperate, the overall result is going to be worse. Since that, if the government run an expansionist policy alone, it will face a negative trade balance. Then, it is more desirable stimulate the foreign demand to lead to a higher GDP with trade surplus. Therefore, an increase in demand in all countries increases both exports and imports for all economies, so that all economies expand without experiencing a trade deficit. 
Finally, the course makes clearer for me how the forex market works. Since that, I could understand how the government can try to improve the price of national goods in comparison to foreign good by changes in the exchange rate. It means, for instance, a decrease in the exchange rate makes international products become more expensive and the national products, cheaper. Additionally, before I could not understand why all countries in the world have only one currency like European union, but now I could understand why each country need to be able to control their exchange rate in order to deal with the trade balance to avoid trade deficit and seek for trade surplus either in short-run and long-run.