Current macroeconomic policy issues

There are contrasts in macroeconomic policy between Japan, Europe, and the US:

Japan: is still very concerned about deflationary pressures (exacerbated ironically by the fall in oil prices). Its inflation target of 2% (a rate of inflation that would tend to stimulate the economy because it would encourage consumer spending and firms’ plans for increasing output, by boosting profit margins) has not been met. Expansionary fiscal policy has probably reached its limit, due to the size of the national debt (over 200% of GDP). Therefore, expansionary monetary policy will continue to be used aggressively. However, interest rates are as low as they can get. Therefore QE (quantitative easing, which expands the supply of money by “printing money” to buy bonds from banks and the public) is being used. But will firms and consumers borrow the newly availably money from the banks?

Europe: the popular movement against “austerity” (contractionary fiscal policy to try to balance budgets) is growing, particulary in Greece and Spain, which are still mired in recession.  Supporters of austerity had asserted that it would eventually restore economies to growth because investors would have more confidence once government finances were more sound.

The election of an anti-austerity party in Greece makes it likely that Greece will refuse to accept the conditions (similar to the SAPs -structural adjustment programs imposed on ELDCs in the 1990s) laid down by the IMF and the European Central Bank for the loans they received.  Greece may also default (fail to pay the interest etc) on its debts to the IMF and other European governments. So will Greece start increasing government expenditure and cutting taxes–widening the budget deficit? Will it then have to leave the European Uniion?

US: Unlike Europe, the US did not impose austerity policies in the wake of the 2008 crash. Instead it adopted a more Keynesian expansionary fiscal approach. As predicted this approach is now having the rather paradoxical result of NARROWING the budget deficit. This is because the US is on a growth path with unemployment fallling. Consequently, as incomes and spending rise, tax revenues also rise and government expenditure on welfare benefits (particularly for the unemployed) have naturally fallen.


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