ASSIGNMENT ON SUCCESSES OR FAILURES OF MACROECONOMIC POLICIES IN ADVANCED COUNTRIES IN RECENT YEARS BY LYNDA MARYAM UMORU Ssc0804177 GROUP 16 ADVANCED

MACROECONOMICS ECO(414)

INTRODUCTION
During the golden age of Keynesian fiscal policy in 1950 s and 60 s, many economist advocated the use of fiscal policy 2 remove minor fluctuation around full employment level, recommending that fiscal policy be altered frequently and in relatively small amounts in other to hold GNP almost at its full employment level. This phenomena was known as fine tuning. But because of the problems associated with the concept for example decision lags and excursion lags, associated in implementing the policy it runs the risk of being procyclical, as a result it is unpopular today. In the post World War 2 the main economic issues were unemployment and inflation and so macroeconomic policies in advanced countries sought to fight them, with average level of success. The post world war 2 experience confirmed that both fiscal and monetary policies are formidable tools for counter cyclical output stability. However fiscal policy was slightly more effective because of the shortness of the excursion lag, and the directness and predictability of the results. Fiscal activism is the use of active, even aggressive fiscal policy to influence the economy. It prevailed in advanced countries in the 1950 s, 60 s 70 s and 80 s.and produced some great results for example the 1964 tax cut succeeded in reflating America s economy. However though fiscal policy was able to affect the economy it was not able to balance it. In addition to that, the concept of stagflation emerged in 1970 s. These led to the questioning of the efficacy of fiscal policy as an instrument for counter cyclical balancing of the economy.

In the early 1980 s monetary policy confirmed itself as a valiant anti inflation weapon as it helped to reduce the rate of inflation in . Inflation fell from 12.4% in 1980 to 8.9% in 1981 and ended at 3.9% in 1982. But although monetary policy helped in drastic reduction in rate of inflation it produced a major recession. I have attempted a brief summary of the effectiveness of macroeconomic policies through time, the objective of this term paper is to analyze the successes or failures of macroeconomic policies in recent years, beginning from 2000. As the global financial crisis is the main issue that occurred in recent years, this paper would analyze the policies in the light of the crisis.

Pre crisis trends of macroeconomic policy

In the U.S. while factors such as these may have played an enabling or compounding role, the root causes of the crisis, in my view, started in the United States. Those root causes were an ideology of market fundamentalism and the policies flowing from it. The concern is not with the level of U.S. interest rates but with flows of finance into toxic mortgage-related securities. A subtler argument made by Obstfeld and Rogoff (2009) is that global imbalances and the excesses resulting in the financial crisis were jointly determined by the stance of policy. In the early stages of the debate it was fashionable to indict U.S. fiscal policy and specifically the deterioration in the budget balance following the Bush tax cuts of 2001-2. Public dissaving meant national dis-saving, widening the current account deficit. By artificially goosing the U.S. economy, the budget deficit goosed the housing market. But much subsequent literature has questioned the link between fiscal policy and global imbalances. And while the fact of large pre-existing deficits limited the authorities options when the crisis struck and raised questions about medium-term fiscal sustainability, this is different from saying that fiscal policy caused global imbalances and the crisis. More recently, debate has focused on the role of monetary policy in the crisis. U.S. monetary policy was too loose in 2003-4, it is alleged, when the Fed s discount rate was significantly below the levels suggested

by the Taylor Rule. Global imbalances may not have been responsible for the decision. In 2004, the gap between the level of interest rates predicted by the Taylor rule and the Fed s policy rate was at its peak. U.S. households responded to the availability of cheap credit by going on a spending binge. This was the driver for both the housing boom and global Imbalances. With benefit of hindsight we can say that the Fed overestimated the danger of a Japan-style deflation. It overreacted by cutting rates so aggressively and leaving them low even once the economy began recovering in 2003.

Macroeconomic policy response to financial crisis

It took three quarters, from the summer of 2007 to the spring of 2008, for the U.S. crisis to spread to the rest of the world. In addition to the sheer fact of a U.S. recession, there was the impact on banking systems (mainly in Europe) and on trade (mainly in Asia and Latin America). Why European banks should have been infected is no mystery. Feeling the intensification of competition (in their case owing to the Single Market rather than the elimination of Glass-Steagall), they were even more highly leveraged than their U.S. counterparts and heavily invested in structured financial products. In some countries, Spain, Ireland, and the UK for example, they were also deeply implicated in local housing booms. throughout the period of the Federal Reserve following the mandates, the relative weight given to each of these goals has changed, depending on political developments In particular, the theories of Keynesianism and Monetarism have had great influence on both the theory and implementation of monetary policy, and the "prevailing wisdom" or consensus view of the economic and financial communities has changed over the years. By the summer of 2008, the world economy was tracking the Great Depression number 2. The policy response was quick and powerful. That the advanced countries responded with aggressive monetary and fiscal easing is unsurprising; officials were acutely aware of the dangers of inaction (Wessel 2009). Their fiscal positions were strong, making it possible to increase public spending without exciting fears for fiscal

sustainability. Currency and maturity mismatches had been reduced, so that depreciation of exchange rates did not threaten financial stability. Because central banks had built credibility, cutting interest rates did not automatically excite fears of inflation. Large war chests of foreign reserves enabled central banks to support the exchange rate where necessary, provide dollar funding, and otherwise reassure investors. The U.S. moved first, applying the largest stimulus of any country in 2008. By 2009 However, the stimulus applied by other advanced countries matched that of the United States, Scaled by GDP. It is worth reminding oneself in light of subsequent events that the fiscal stimulus applied By EU G20 members was relatively small all through the period shows that there was some tendency for the countries experiencing the sharpest Slowdowns to apply the largest stimulus packages, as might be expected. But there is a tremendous Amount of dispersion around the average relationship: to cite some obvious cases, the fiscal stimulus Packages applied by the U.S. and China were even larger than can be accounted for by the extent of their Downturns, while those of Italy and the UK were smaller than might have been expected. Exchange rate adjustment played a positive role in global Adjustment to the crisis.. Europe in 2009, to relied less on fiscal stimulus and more on aggressive monetary stimulus.

Successes or Failures of Macroeconomic Policies in Advanced Countries, in Recent years.

First, the world economy stands at a crucial crossroads. There are strong positive signs of recovery in the United States and the beginnings of pickups in Europe and Japan.

The U.S. economy has left the bottom of the cycle's valley and is moving upward, and a recovery is forecasted for Europe for the next year. There is definitely is no deflation in either economy. Second, global growth needs to proceed on a much more balanced geographical basis, The U.S. trade and current account deficits are approaching $600 billion and have risen by almost one full percent of GDP in five of the last six years. The net foreign debt of the United States now approaches $3 trillion and is growing by 20-25 percent per year. The further expansion of fiscal policy can in no way be justified; In the United States the budget deficit is already high anyhow, at 3.7 percent in 2003 and 4.4 percent of GDP in the fiscal years 2002-03 and 2003-04. In the euro area, Germany and France have surpassed the Maastricht criteria. Germany, producing one-third of the euro area's GDR will violate the 3 percent norm for the third year with budget deficits of 3.5 percent in 2002, 3.8 percent in 2003 and a forecasted figure way above 3 percent in 2004. A similar story applies to France. The situation is clearly on an unsustainable trajectory. The dollar will have to fall considerably further to restore n sustainable equilibrium in the United States and world economies if it remains the primary tool of adjustment. The adverse impact on other countries' economies could be severe, especially in Europe, where the euro has already shouldered most of the counterpart appreciation. The stability of money always depends on the solidity of public finances. This is a specific issue in the euro area where the currency is Europeanized but budget decisions are subject to national political decision making. What would happen if the international financial markets lost confidence in the euro because the budget deficits of the member states ran out of control? Anyway, demand expansion is not the strategy that will

solve the structural issues of the three major continental countries of Europe: Germany, France, and Italy. These structural issues lie in the high social welfare spending in these countries. Their systems of social security cannot be financed any more, not even considering the aging of the population. To finance these systems puts a tax on labor weakening the demand for labor; in addition the income floor they provide dries up the low segment of the labor market. All this, plus the institutional setup of wage-bargaining, is at the root of the high and persistent unemployment, the low capacity for shock absorption, and the low growth performance. Demand expansion would not solve these structural issues of the welfare state. Moreover, Europe would fall into a debt trap like Japan. It would be irresponsible to run into higher debt when debt already finances social welfare spending. An issue related to coordinated demand management is stable exchange rates. Of course, no one wants volatile exchange rates. But this would need such a tremendous amount of explicit coordination in monetary, fiscal, and other policy areas between the major regions of the world that it is simply unrealistic. Here are just two of the policy areas that influence the exchange rate and would have to be coordinated. The continental countries all have some type of wage policy undertaken not by the government but by the social partners, while in the United States, wages are determined in the markets. Or take the difference in social welfare spending of 20 percent of GDP for the public retirement, unemployment, and health systems in Germany, France, and Italy versus half that percentage for the United States.

In regards to stable prices - While some economists would regard any consistent inflation as a sign of unstable prices, policymakers could be satisfied with 1 or 2%; the consensus of "price stability" constituting long-run inflation of 1-2% is, however, a relatively recent development, and a change that has occurred at other central banks throughout the world. Inflation has averaged a 4.22% increase annually following the mandates applied in 1977; historic inflation since the establishment of the Federal Reserve in 1913 has averaged 3.4%. In contrast, some research indicates that average inflation for the 250 years before the system was near zero percent, though there were likely sharper upward and downward spikes in that timeframe as compared with more recent times. Central banks in some other countries, notably the German Bundesbank, had considerably better records of achieving price stability drawing on experience from the two episodes of hyperinflation and economic collapse under the country's previous central bank. Even though some countries like the United States had great evidence of the efficacy of macroeconomic policies, accomplishments here are less than meet the eye. In the U.S., nothing has been done to downsize big banks. The role of the credit rating agencies in regulatory decision making has not been eliminated. Other than abolishing the Office of Thrift Supervision, nothing has been done to consolidate the fragmented process of supervisory oversight.

Conclusion
While this crisis, like all crises, had multiple causes, at its center were problems of lax supervision and regulation, in the advanced countries in particular. It is appropriate therefore that post crisis efforts in the United States and the other advanced countries should focus on regulatory reform. Too many advanced countries entered the crisis with large budget deficits and elevated debts. An unprecedented crisis justified an unprecedented fiscal response, but against a backdrop of fiscal profligacy it also created unprecedented problems of debt sustainability. Emerging markets learned from the crises of the 1990s the importance of running budget surpluses and keeping fiscal capacity in reserve. One can only hope that the advanced countries, including the United States, now take that lesson to heart. The crisis underscores the importance of early and concerted intervention to resolve banking-sector problems. Banks with impaired balance sheets relying on the market to recapitalize themselves will not be lending. And in the absence of bank lending, even aggressive fiscal stimulus will not jump-start private spending. The political impediments to early intervention are considerable. Also the response to the crisis is a reminder of the importance of coordinating monetary and fiscal policies. From the above findings it can be observed that, in recent times both fiscal and monetary policies are used together and they complement each other. The acceptance and use of discretionary fiscal and monetary policies to reduce or remove business cycles, have been moderate even in the recent years, the

occurrence or incidence of business cycles have not decreased. It has however helped to reduce the severity of business cycles.

REFRENCES Lawrence H. Summers, Reflections on Fiscal Policy and Economic Strategy Remarks at the Johns Hopkins School of Advanced International Studies, (2010). Jeff Frankels, Veiws on the economy and the world, (2012). Don Harding International Capital Flows, Exchange Rates and Macroeconomic Policy(1999) Barry Eichengreen Macroeconomic and Financial Policies Before

and After the Crisis, University of California,( 2010). Milton A. Iyoha, Macroeconomics theory and policy,( 2004).