Macroeconomic Issues

Macroeconomics Problems can affect the economy in a major way. This article on Macroeconomics Problems highlights the causes and effects.
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Bimal Jalan 12 Sep, , Retail to etail, festive sales may grow in double digits 12 Sep, , Why burning oil, melting rupee should not worry India 11 Sep, , Subhash Chandra Garg 10 Sep, , Jobs changing with Artificial Intelligence but no mass unemployment expected: UN labour expert 5 Sep, , Rupee to stabilise on its own, dip not due to domestic factors: Govt 4 Sep, , Too early to say there has been a change in market leadership: Adrian Mowat 3 Sep, , Foreseer of financial crisis, Raghuram Rajan warns of toxic mix on trade 24 Aug, , A movement from A to C takes the economy away from its normal trend.

When recession sets in, economy moves down-hill from C to D ; if the downtrend is not arrested, economy may get caught in slump or what is also called depression. E to F represents the recovery phase. This cyclical behavior of economic activity has always attracted the attention of practitioners of macroeconomics. As a matter of fact, it was the great depression of s that gave birth to modern macroeconomics, in a form that came to be known the Keynesian Revolution.

Inflation Inflation can be defined as a sustained rise in the general price level. It has been the experience the world over that a rise in GDP has generally been accompanied by an increase in the general price level. But frequently rising general price level went out of control and reached astonishing limits.

The phenomenon of inflation and its converse deflation is conventionally analyzed in macroeconomics. Unemployment Another experience common to most of the economies in the world, developed and developing alike, has been that the rate of creation of new job opportunities has lagged behind the demand for jobs. As a result, apart of the labour force remains unemployed. This non-utilization of available resources in the economy represents a deadweight loss. Macroeconomics ahs been trying to seek a lasting solution to this perennial problem.

Government Budget Deficits Government has been traditionally spending more than what they could earn by way of taxes and sale of economic goods and services produced by them. The resultant deficit variously known as budget deficit or fiscal deficit could be financed by mobilization of capital by way of loans. An excess of government expenditure over revenue enabled it to create more jobs and thereby help the economy generate more income. During the discussion, Indonesia's Robby Djohan emphasized the considerable importance that financial markets attached to current account sustainability.

Djohan viewed export growth, the composition of import growth, the structure of capital inflows, the credibility of the exchange rate, and the level of reserves as being important factors governing the risks associated with external deficits in the region. He emphasized that policymakers could contribute to sustainability by ensuring that policies were transparent, implementation was consistent, the private sector was given a dominant role, and trade and investment policies fostered openness.

Both Thailand's Somchai Richupan and Indonesia's Dono Iskandar focused on the importance of fiscal policy in the mix of measures to reduce current account deficits. Iskandar noted that fiscal adjustment in Indonesia also had to contend with the declining importance of oil revenues and that this had required tax reform efforts, the strict prioritization of expenditures, and the provision of a greater role to the private sector in infrastructure development.

Richupan pointed, in addition, to reforms designed to improve revenue collections at the state and local levels in Thailand. The IMF's David Robinson provided additional background on the determinants of private saving in the region, noting that, in the short term, dependency ratios would continue to fall in a number of countries in the region, which should help boost private savings. He said that a supportive macroeconomic environment, the maintenance of competitive returns on financial saving instruments, and the development of fully funded pension schemes were promising avenues for increasing private saving in the region.

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However, because their effects were likely to be felt only with relatively long lags, Robinson saw fiscal policy as the most effective tool for raising national saving and reducing current account deficits in the near term. The discussion focused on both tax and expenditure policies as ways to increase public saving.

Many speakers judged that improvements in tax administration and tax collection systems could make a strong contribution. Some speakers pointed to the still low ratio of tax revenue to GDP in the region--considerably below that in many other countries--and saw revenue increases through expanding tax bases and more efficient tax administration as important channels for raising public saving.

Economic Growth

With respect to government expenditure, there was agreement that policymakers would have to carefully weigh important competing claims for additional spending on physical and human infrastructure rather than on other activities. Speakers also saw a role for developing stricter criteria to evaluate the returns on public sector investment and for developing a more supportive environment for private sector participation.


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Monetary Policy, Financial Liberalization, and Capital Market Development Two of the background papers examine the substantial changes that have taken place in financial and capital markets in the ASEAN region since the early s and their implications for the financing of economic activity and the conduct of monetary policy. Robert Dekle and Mahmood Pradhan 's paper on financial liberalization and money demand in ASEAN countries reviews empirical evidence that points to continuing instability in the relationship between money growth, economic activity, and inflation.

Their analysis suggests that policymakers need to look beyond the behavior of monetary aggregates--to a wider set of monetary and real sector indicators--to assess monetary conditions. Their paper reviews the feasibility of alternative policy frameworks, such as nominal income targets and inflation targets, and suggests that policy credibility would be enhanced by greater transparency in the making of monetary policy decisions.

Tim Callen and Patricia Reynolds, in their paper on capital market development and financial deregulation, look at these issues from the additional perspective of the financing of economic activity in Malaysia and Thailand.

Here are the key macroeconomic issues to watch out for in the year to come

They find that rapid investment and growth have been associated with a shift in corporate financing from internally generated to externally generated funds, consistent with trends elsewhere in the world. Callen and Reynolds underscore the need for close monitoring of future developments and trends affecting corporate leverage ratios, the growth of domestic bond markets, and changes in the composition of bank loan portfolios, as part of effective monetary management. John Montgomery 's paper examines the impact of financial liberalization on Indonesia's financial system.

It reviews the general experience of financial liberalization in other countries and points to the potential for such liberalization to result in the increased risk of poor lending decisions by domestic banks. Montgomery identifies key policy issues that should provide the focus for further improvement of the performance of financial markets and institutions in Indonesia. These include the need to resolve rapidly the problem of undercapitalized banks, improve the supervision and regulation of banking and securities markets, and deepen and expand the competitive structure and domestic investor base of these markets.

Macroeconomics

The recent surge in capital flows to many developing countries, particularly in Asia and Latin America, has been associated with widening current account deficits and concerns about exchange rate appreciations. Peter Montiel 's paper on exchange rate policy and macroeconomic management in ASEAN countries examines the impact of the large-scale capital inflows on the real effective exchange rate in the region.

Montiel finds that, unlike in Latin America, the recent capital-inflow episode did not result in an appreciation of the long-run real effective exchange rate in the ASEAN countries.

The equilibrium rate appreciated in Singapore after about and in the Philippines after , but stabilized or continued to depreciate in Indonesia, Malaysia, and Thailand. Montiel does not find evidence of misalignment in the real exchange rates of any of the countries in the sample at the end of He therefore concludes that the performance of the real effective exchange rate in these countries can be interpreted as broadly consistent with long-run equilibrium over the period reviewed.

Many of these themes were discussed extensively at the conference, especially the implications of structural changes in the financial environment of the ASEAN countries including for monetary and exchange rate policy , and the impact on domestic financial systems. Indonesia's Soedradjad Djiwandono, in his lead presentation, pointed to instabilities in the relationship between money growth, economic activity, and inflation, caused by structural changes, that resulted in monetary policy in Indonesia being conducted with reference to a broader range of financial variables.

The Philippines' Amando Tetangco said that the same instabilities had stimulated the development of a form of inflation targeting in the Philippines, which had incorporated flexibility with respect to capital inflows and indicators of financial deepening. Tetangco said that the regime had worked well so far, with generally low inflation, less variable and declining interest rates, and a stable exchange rate.

With respect to the exchange rate, Soedradjad noted that the increased mobility and size of international capital flows had also complicated the conduct of policy. He pointed to the recent greater flexibility in Indonesia's exchange rate--a crawling exchange rate band--as an attempt to address some of the difficulties posed by capital inflows and give greater control to monetary policy.

Malaysia's Zeti Akhtar Aziz focused on the impact of increased short-term capital flows on monetary policy and emphasized that an independent monetary policy required flexibility in the exchange rate regime. However, Zeti pointed out that the level of the exchange rate was also important, with policymakers facing the dilemma of allowing the exchange rate to adjust partly or fully to short-term flows.

She pointed to the risk of overshooting in this process, noting that the exchange rate was more volatile than was desirable. Moreover, given the costs of, and limits to, sterilized intervention, Zeti observed that administrative controls on short-term capital flows remained a temporary option in certain circumstances.

What is 'Macroeconomics'

The discussion placed considerable emphasis on the importance of sound domestic banking systems, with Soedradjad stressing that weaknesses in financial institutions translated into additional constraints on monetary policy. A number of speakers echoed this point, with Thailand's Bandid Nijathaworn discussing the range of policies needed to safeguard financial systems in a rapidly changing environment.

Nijathaworn emphasized, in particular, the strict enforcement of capital adequacy requirements, close monitoring and continuous assessments of banking system vulnerability to capital flows both inflows and outflows , and the potential need for measures designed to discourage the banking system from extending excessive credit, as well as the importance of a strong fiscal position as an anchor in a volatile financial environment.