Introduction to the Course

and Main Issues in the Global

Economy

by
Nouriel Roubini
Stern School of Business
New York University
September 2015

InternationalMacroeconomicPolicy:
TheoryandEvidencefromRecent
FinancialCrises

Westudymacroeconomicdevelopments:growth,
unemployment,consumption,investment,inflation,trade
balances,exchangerates,etc.
Macroeconomicsisaninternationaldisciplineasmost
economiesarenotclosedbutopentotradeingoods,
services,labor,capital,technology,information
(globalization).
Mostcountriesaresmallopeneconomies;some(U.S.)
arelargeopeneconomies.Theworldeconomyis
interdependentandinterconnectedthanksto
globalization

InternationalMacroeconomicPolicy
Macroeconomicdevelopmentsdependonmacropolicies:
Conventional(thepolicyratetool,themoneysupply)
andunconventionalmonetarypolicysuchas,ZIRP
(ZeroInterestRatePolicy),QE(QuantitativeEasing),
CE(crediteasing),FG(ForwardGuidance),Negative
InterestRates,LiquiditySupportofBanksandNonBanks
Conventional(taxandgovernmentspending)and
unconventionalfiscalpolicy(bailoutsandbackstopof
banks,households,corporationsandotherstate
guaranteesforeconomicagents

InternationalMacroeconomicPolicy
Macroeconomicdevelopmentsdependonmacropolicies:
Exchangeratepolicies:choiceoftheexchangerateregime
(fixed,flexible,etc.),forexintervention,capitalcontrols
Supervisionandregulationofthebanksandotherfinancial
sectorintermediaries(capitalregulation,liquidityregulation,
macro-prudentialsupervision,counter-cyclicalcreditpolicy)
Internationaleconomicpoliciessuchascoordinatedmacro
policiesaswellasinternationalbailouts(bytheIMForthe
Troika)ofcountriesorbail-inofcountries(coercive
restructuringofpublicand/orexternaldebt)

Thenexusbetweenmacronews,policy
reactionsandmarkets/assetprices
MacroTriangle:macrodevelopments/news,policy
reaction,marketsandassetprices
Macrodevelopments/newsleadtopolicyreactions
Thosepolicyreactionsaffecttheevolutionofthemacro
variables
Macronewsandmacropoliciesaffectmarketsandasset
prices(stocks,bonds,currencies,commodities,credit)
Assetpricesreacttomacronewsandpolicynews,ie
unexpectedratherthanexpectedchanges.
Assetpricechangesleadtopolicyreactionsandaffect
macrovariables(throughwealtheffectsandpriceeffects)

TheoryandEvidencefromRecent
FinancialCrises
Financialcriseshavebecomemorefrequentandseverein
bothdevelopedmarkets(DM)andemergingmarkets(EM)
Recentdevelopedmarketscrises
UShousingandsub-primecrisisin2006-2008
GlobalFinancialCrisis(GFC)of2008-2009
SovereigndebtcrisesandeconomiccrisisintheEurozone(20102013):Greece,Ireland,Portugal,Spain,Italy,Cyprus,Slovenia.
GrexitRisk.

Recentemergingmarketcrises:
Mexico(1994),EastAsia(1997-98),Russia(1998),Brazil(1999),
TurkeyandArgentina(2001)
EMmini-crisisin2013-15andChinas2015turmoil

NatureofFinancialCrises
Therearemanytypesoffinancialcrises:
Currencycrisiswhenafixedexchangerateregimecollapsesor
acurrencygoesintoafreefall
BalanceofPayments(BoP)orexternaldebtcrisis
Sovereigndebtcrisis
Bankingcrisis
Corporatedebtcrisis
Householddebtcrisis
Broadfinancialcrisisthatcombinesmanyelementsoftheabove
crises(Argentina2001forexample)

Typesoffinancialcrises:liquidity
versussolvencycrises
FinancialCrisescanbedistinguishedintotwobroadtypes:
Solvencycrises
Liquiditycrises

Insolvency:Anagentisinsolventwhenitsdebtrelativeto
itsincomeissohighthatinmoststatesoftheworlditwill
notbeabletopaybackitsdebtandtheinterestonit
(unsustainabledebt)
Illiquidity:Anagentissolventbutilliquidwhenitsdebtis
notunsustainablebutithaslargeamountsofthisdebt
comingtomaturity(shorttermdebt)anditisnotableto
rollitover(liquiditycrisis,rollover/runcrisis)

LiquidityversusSolvencyCrises
Manycombinationsofliquidity/illiquidityand
solvency/insolvency
Illiquiditycanleadtoinsolvencyasilliquiditycantrigger
default
Illiquiditycanberesolvedvia:
Domesticorinternationallenderoflastresortsupport
(bailouts)tostoprollover/runcrises
Orderlybutcoerciverestructuring(maturityextension)of
debts(bail-inofcreditorspolicies)
Insolvencyisresolvedvia:
Orderlydebtrestructuringbeforedefault
Disorderlydebtrestructuring(default)

CourseStructure
Syllabus:
http://people.stern.nyu.edu/nroubini/MACRO5.HTM
Textbooks
ReadingList:
http://pages.stern.nyu.edu/~nroubini/Readingl3.html
Assignments:
http://people.stern.nyu.edu/nroubini/ASSIGN01x.HTM
Requirements(assignments,mid-termexam,finalexam)
Otheronlineandofflinetoolsforthecourse

CurrentGlobalEconomicOutlookand
Uncertainties(KnownUnknowns)
FormerU.S.DefenseSecretaryspokeduringthe
IraqWarofknownknowns,knownunknowns
andunknownunknowns.
Knownunknownsareknownrisk/uncertainty
factorsthatwillmaterializeinthefutureinone
wayoranother
Theworldeconomyischaracterizedtodayby
manyknownunknowns,forexamplewhich
partywillwinthe2015U.S.presidential
elections?

KnownUnknowns:Greece9/20
elections
KnownKnown:Varoufakiswillnotbethe
nextPrimeMinister
KnownUnknown:WillSyrizaorNew
Democracywinthoseelections?Has
Grexitbeenavoidedoronlyposponed?
Unknownunknown:Eventualriseto
powerofextremerightwingGoldenDawn
party?

KnownUnknown:Economy,Fedand
exitfromZIRP
Willeconomicgrowthfinallyaccelerateabove
potential?
Willwageandpriceinflationremaincontained
oraccelerate?
IstheUSinasecularstagnationwithlow
potentialgrowth?
WhatisthelevelofNAIRU(structural
unemploymentrate)?
WillTPPbeagreedandpassedbyCongress?

KnownUnknown:FedExitfromZIRP
(ZeroInterestPolicyRate)
WhenwilltheFedstartexitingfromZeroPolicyRate(Fed
Fundsrate)?
InSeptember2015
InOctober2015
InDecember2015
In2016orlater
WhenwilltheFedfinishnormalizingthepolicyratetoa
neutrallevelandwhatthislevelwillbe?

Oneyearafterstarting(asinthe1994-1005cycle)
Twoyearsafterstarting(asinthe2004-2006cycle)
Threeyearsafterstarting
Morethanthreeyearsafterstarting

KnownUnknown:U.S.FallFiscal
Fistfights
Threefiscalknownunknownsin2015in
theU.S.:
Governmentshutdowninfall2015?
WillRepublicansstartanotherfightonthe
debtceilingin2015asin2013?
Continuationofthespendingsequesteror
agreementtoreplaceitwithsomethingelse
post2015?

Macroandmarketimplicationsofthese
knownunknowns
Theresolutionoftheseknownunknowns(growth
andinflation,Fedexitfromzerorates-firsthike
andnormalizationpace-,U.S.fiscalfightsin
Congress)willaffect:
Therealeconomythroughdemandand
confidence(consumer,business)effects
Thefinancialmarketsandassetpricesinthe
U.S.andglobally:bondyields,stockmarket,
creditspreads,U.S.creditrating,U.S.dollar
value,commodities,emergingmarkets.

CurrentKnownUnknowns
intheGlobalEconomy
U.S.economic,monetaryandfiscaluncertainties
Prospectsforgrowthindevelopedmarkets(DM)
andemergingmarkets(EM)
WillDMreturntostronggrowthorwilltherecovery
remainanemicandsub-par?
IstherecentslowdowninEMcyclicalorstructural?
WillsomeEMexperienceafullcrisisandwhich
onesaremostatrisk?
Chinahardorsoftorbumpylanding?

CurrentKnownUnknowns:
Summer2015Turmoil
Whatcausedtheglobalfinancialturmoilandvolatilityinthe
summerof2015?
ConcernsaboutaChinahardlandingandconfusedChinese
policies?
ConcernsabouttheFedexitingZIRPtoosooninspiteofthe
gatheringcloudsinChinaandEM?
Thesharpfallinoil/commoditypriceshurtingcommodity
exportingemergingmarkets?
Anincreaseinglobalriskaversionthatexacerbatedthe
Chinashock?
Willthevolatilityandmarketcorrectionscontinueorabatein
thenextfewmonths?

CurrentKnownUnknowns
intheGlobalEconomy:Europe
WilltherecoveryofgrowthintheEurozonebe
robustorweak/anemic/uneven?
IstheEZatriskofdeflation?
WilltheItaliangovernmentsurvive?
PoliticalrisksinGreece,Spain?
WilltheECBdomoreQEandwhen?
WillEZfiscalpolicybecomemoreflexible?
Willstructuralreformsaccelerateandwhere?
WilltheEuroriseorfall?

CurrentKnownUnknowns
intheGlobalEconomy:Japan
WillAbenomicsworkinJapan?
Strongergrowthandinflationincreaseorrelapse?
Willstructuralreformsandtradeliberalizationbe
implementedincludingTPP?
WilltheVATtaxbeincreasedin2017?
WilltheBoJdoadditionalQEin2015-16?
Whatistheriskofapublicdebtcrisisinthenext
fewyears?
WilltheYenweakenfurtherandequitiesrally?

CurrentKnownUnknowns
intheGlobalEconomy:China
WillChinaexperienceasoftlandingorahardlandingor
abumpy?
WillChinarebalancegrowthawayfromtoomuch
savings,investmentandexportstowardsprivate
consumptionandlaborintensivegrowth?
Whichstructuralreformswillbeimplementedin201516?
WillChinadoanotherroundofpolicyeasingthisyearas
growthlooksfragile?
WilltheRMBdepreciatefurtherornot?
Willthestockmarketfallfurthersharply?

CurrentKnownUnknowns
intheGlobalEconomy:EM
IstherecentslowdownofEMcyclicalor
structural?Whatareitscauses?
Willfinancialpressuresintensifytothepointofa
crisisinsomeEMorwilltheydiminish?
WhichEMaremostatriskandwhy?
WhatpolicyoptionsareavailablefortheseEM
atrisk?
Whatarethemediumtermprospectsforthe
BRICSandotherEM?

CurrentKnownUnknowns
intheWorld:GeopoliticalRisks

WilltheRussia-Ukraineconflictescalateornot?
Syria-Iraq-ISIS:furtherdestabilization?
WilltheIrannuclearpassandsucceed?
Asianterritorialissues(asinthecaseofJapanChinadisputeonsomeislands)
Geo-politicalimplicationsoftheriseofChina:
peacefulrise?
Whichotherunknownunknowns(likea9/11eventor
otherterroristattacks)?
Willmarketskeeponignoringgeopoliticalrisks?

Theglobaleconomyaftertheglobal
financialcrisis(GFC)
TheeconomicrecoveryaftertheGFCwastwo-speed:
Anemic,sub-par,belowtrendinDM(US,EZ,UK,
Japan):U-shaped
Strongwithreturntopotentialorabovetrendinmost
EM:V-shaped
WhyV-shapedinEM?
Lessbalancesheetproblemsoftoomuchprivateandpublic
debts.CleanupafterEMcrisesofthe1990s
Higherpotentialgrowth(5%inEMvs1-2%inDM)
Moreroomforpolicyresponse

WhyU-shapedRecoveryinDM?
The2008-09crisiswasnotaplainvanillarecession
Itwasarecessioncausedbyafinancialcrisis.Anda
financialcrisiscausedinitiallybytoomuchdebtand
leverageintheprivatesector(households,banksandsome
corporates);andthenduringthecrisisbyasurgeinpublic
debtanddeficits
Historyandtheorysuggeststhatrecoveryfrombalance
sheetcrisesisanemicforuptoadecade:youneedto
spendlessandsavemore(dissaveless)toreducedebt
andleverageovertime.Thus,ananemicrecovery.
Actually,adoublediprecessioninsomeDM(EZ,UK,
Japan)

Howdidweavoida
GreatDepression2.0?
DuringtheGFC(btwthecollapseofLehmanandmid2009)globaleconomicactivitywasfallingataspeed
similartothebeginningoftheGreatDepression
TheGreatRecessionof2008-09couldhaveendedup
intoGreatDepression2.0.
Whatavoidedthat?LearningthelessonsoftheGreat
Depressionandavoidingpolicymistakes
Largeconventional/unconventionalmonetaryeasing
Massivefiscalstimulusforawhile
Backstopandbailoutoftheprivatesector(financialsystem,
households,corporations)

Sideeffectsofthemassivepolicy
responseduringtheGFC
Themassivemonetary/fiscal/bailout
responseduringtheGFCwasnecessary
toavoidanotherdepression
Butithasledtolingeringproblems:
HowtoexitfromZIRP,QE,CE,FG?
Howandhowfasttoreducefiscaldeficitsand
debtsthatmaybeunsustainable?
Howtodealwiththemoralhazardthat
bailoutshaveinduced?

DoyouwanttobeKeynesianor
Austrianfollowingafinancialcrisis?
Keynesianapproach:providemonetary&fiscalstimulusand
bailouttheprivatesectorasotherwisetherecessioncanleadto
adepressionasself-fulfillingpanicsandrunsoccurwhileprivate
demandiscollapsing
Austrianapproach(Austerian):front-loadthe
adjustment/reformandrestructurebalancesheetsandP&Ls.
Dontbailoutasyoupostponefinancialandoperational
restructuringandyoucausemoralhazard:zombiebanks,
households,governments
Austrianapproachwastriedinthe1930s(nomonetary/fiscal
stimulusandallowbankstocollapse)andledtoGreat
Depression.Liquidateliquidate!
BernankelearnedthelessonsoftheGreatDepression

DoyouwanttobeKeynesianor
Austrianfollowingafinancialcrisis?
IntheshortrunyouwanttobeKeynesianasyou
wanttoavoidpanic,animalspirits,runsand
illiquiditytoleadtoacollapseoftheprivatesector.
Publicdemandhastosubstituteforcollapsing
privatedemand.Rescueilliquidbutsolventagents.
Inthemedium-longtermyouwanttobemore
Austriananddotrueeconomicandfinancial
restructuringas,otherwise,youcanzombifythe
economyandreducelongtermgrowth
Areproblemsofilliquidityorinsolvency?

ThesedebatesKeynesianvs
Austrian-arestillongoingtoday
Growthversusausteritydebate
Frontloadfiscalausterity(asinEZand
UK)orbackloadit(US,Japan)?
Beveryaggressiveinmonetaryeasing
(USandJapan)orlessaggressive(UK,
EZ)?
Bailoutbanksandrecapitalizethemfast
(US)orgoslow(EZ,UK)?

Empiricalevidenceon
appropriatepolicyresponse
USavoidedadoublediprecessionandisgrowingata
2%+rate(outputabovepre-crisislevel).Noweven
Japanisgrowingbetter
UKgrowingmorestronglyafteranemicrecovery
EZhadadoublediprecessionandisnowweakly
growing(GDPstillbelowpre-crisislevel)
Whatexplainsthisrelativeperformance?
RelativemonetaryeasingstrongerinUS/Japan/UK
Frontloadorbackloadoffiscalconsolidation
Backstoppingthefinancialsystemandrecapitalizingthe
banksearlyontoavoidaseverecreditcrunch

RecentReversalof
DMvsEMGrowthFortunes
In2010-2012slow,anemicgrowthinDM
(U-shaped),stronggrowthinEM(Vshaped)
In2013-15:
SignsofstrongergrowthinDM(US,UK,less
soinEZandJapan)
SharpslowdownofgrowthinEMandfinancial
pressuresonEMmarkets

WhygrowthisrecoveringinDM?
Deleveragingofprivateandpublicsectorbalance
sheetshasbeenongoingfor7years.
Newroundsofunconventionalmonetarypoliciesinthe
U.S.,Japan(QEandFG)andevenintheEZandUK
(QE,CEandFG)
BailoutsofbanksandsovereignsintheEZavoideda
worsecrisisandEZbreak-up.
Globaltailrisksarenowlower
Themassivemonetarystimulushasledtoasset
reflation(equity,housing,lowerbondyields)thatboosts
confidenceandincreasesdemand

WhyDMrecoverywillremain
uneven?
Deleveragingnotoverasdebtratiosremain
high
Slowstructuralreforms
Riskofasecularstagnation
Easymonetarypoliciesarebecomingless
effectiveasassetreflationmayrunoutof
steam
Lackofproperfiscalpolicy
Policyandregulatoryuncertainties

DMoutlook
Differentialingrowthrates(US/UKversus
EZ/Japan)
Inflationbelow2%targetinDMgivenstill
slackingoodsandlabormarkets
ButinflationweakerinEZandJapanrelative
toUS/UKgivendifferentialgrowthrecovery
Riskofasset/creditinflation/bubbles?
ExitfromzeroratesfasterinUS/UKthanin
EZ/JapanwhereQEwillcontinue

WhyslowdownofGrowthinEM
andFinancialPressures?
StronggrowthinEMinthelastdecade(2003-2013)was
duetostructuralfactorsandcyclical/luckones
Structural:
1stgenerationstructuralreforms(tradeliberalization,
opennesstoFDI,privatizations,openingoftheeconomy)
Soundermonetaryandfiscalpolicyandstrongerbalance
sheetsaftertheEMcrisesofthe1990s
Cyclical:
Chinaboom(10-11%growth)
Commoditysuper-cycle(partlybecauseofChina)
Super-easymonetarypoliciesinDMafter2009.Zeroratesandwall
liquiditysearchingforyield

WhyslowdownofGrowthinEM
andFinancialPressures?
Whyslowdownnowthen?
2ndgenerationreformsdidnotoccur(microonesthatincrease
competitionandproductivity)
Moveawayfrommarketorientedpoliciestowardsstate
capitalism
Somelaxityinmonetaryandfiscalpolicyasliquiditywas
abundant,interestratestoolowandcreditexcesses
Endofluckas:
Chinaisslowingandbecominglessresourceoriented
Thecommoditysuper-cycleisover
HowevergraduallytheFedwillexit0%rates.USbondyields
upfrom1.6%to2.9%afterMay2013tapertantrum

WhichEMwillsufferthemost?
SomeEMhavestrongermacro,financialand
policyfundamentalsandsomehaveweakerones
Weakeronesincludecountrieswithlargecurrent
accountdeficits,largefiscaldeficits,fallinggrowth,
commodityexporters,risinginflation,sociopoliticalprotestandupcomingelections
WeakergroupincludestheFragileFive:India,
Indonesia,Brazil,Turkey,SouthAfrica,Ukraine
OtherfragileEMincludeChina,Russia,Argentina,
Venezuela,Malaysia

WillsomeEMexperienceasevere
financialcrisis?
ComparedtothepasteventheweakerEM(fragilefive)
havesomepositives:
Flexibleexchangeratesratherthanfixedonesthat
couldcollapse
Awarchestofforexreservestoavoidliquidityrunson
banks,currenciesandgovernments
Lesscurrencymismatchesandliabilitydollarization
Lowerprivate/public/externaldeficitsanddebts:less
solvencyrisk
Betterregulatedbanksandfinancialsystems

WillsomeEMexperienceasevere
financialcrisis?
ButtheweakerEMhavesomenegativerisks
Uglypolicydilemma:
Ifyoutightenmonetarypolicytoavoidcurrencyfreefall
andinflation,youkillgrowthanddamage
banks/corporations.Sotightmoneyisnotcredible.
Ifyouloosenmonetarypolicytoboostgrowth,thereis
theriskofaninflationaryfreefallofthecurrencyandrisk
thatforeignerswillnotfinanceyourexternaldeficit.Ifyou
thusloosenmonetarypolicyyoumaylosethenominal
anchoroftheeconomyandthuscauseafreefall
Sodamnedifyoudoanddamnedifyoudont.

FragileEMin2014-15
Jan-Feb2014EMpressures:Argentina,Turkey,Thailand
politicsandChinascare
MarketpressureabatedafterFebruary2014asmany
fragileEMtightenedmonetary,creditandfiscalpolicy.
Marketsrallythatyear.
Butmacroandstructuraladjustmentwasstillpartialin
fragileEM
NewboutofsevereEMvolatilityinEMinspring-summer
2015asChinahardlandingriskroseandledtoafallin
commoditypriceswhiletheFedwassignalingexitfrom
ZIRP

MediumtermoptimismforEMinspiteof
shortrunpressures
MediumtermpositivetrendsinEM:
Urbanization
Industrialization
Populationgrowth
Percapitaincomegrowth
Riseofmiddleclassesandconsumersociety
AlargershareofglobalGDPandgrowthinEM
Highpotentialgrowthgivenby:

Demographicdividend(highpopulationgrowth)
2ndgenerationreformswillboostcompetitionandproductivity
AbilitytoabsorbexistingandnewtechnologiesdevelopedinDM
TechnologicalinnovationinsomeEM(Korea,China,India,etc)

WilltheDMrecoverysoonlift
thegrowthinEM?
Optimisticviewpoint:thestrongrecoveryofDM
growthwillsoonliftviatradechannelsthegrowth
rateofEM(recoupling)
Threereasonstobepartiallyskeptic:
TherecoveryofmostDMwillbesomewhatanemic(EZ,
Japan).
EMhavesomefundamentalmacroandstructuralproblems
thatwilltaketimetoresolve.SoDMandEMmaydecouple
IftheDMrecoverywillbestrongertheFedmayexitzero
ratesfasterandthatwillhurttheweakerEMwhile
benefittingthestrongeronesviatradelinks

USgrowthisimproving
U.S.economyisinatentativeimprovementgrowth
acceleration
AfteraweakQ1growthinQ2andQ3seemsstronger
LatestdataonGDP,labormarket,consumption,
investment,netexportsarebetterbutmixed
Unemploymentratefallingbecauseoffallinlaborforce
participationrateandstrongerjobcreation
Fiscaldragismoremodestnow
Theriseinlongratesin2013giventapertalkcrimped
growthofinterestsensitivesectors(housing,capex)but
in2014-15longrateshavefallen.Why?

CausesofUSgrowth
acceleration
Moreadvanceddeleveraging,easyFed
policies,positiveassetreflation,lessglobal
tailrisks
Shalegasandoilrevolution
Re-shoringofenergyintensivemanufacturing
Strongerlabormarketwithjobcreation
StrongP&Landbalancesheetofcorporate
sectorandbanks

SomelingeringUSrisks
Structuralreformsarenotoccurring
GridlockinCongressandpartisanship
Somehouseholdsandyoungarestillfragileincome-wise
anddebt-wise
Couldinflationrearitsuglyhead?
Implicationsoftheriseininequality
Riskofsecularstagnationandwhy?
Caneconomysustaintheriseinshort&longratesasthe
Fedexits&debtratiosarestillhigh?
Riskofcredit/assetbubblesasFedexitisslow.Willmacropruwork?

TheMacro-PruDebate
AfterGFCcentralbankscarebothabouteconomicstability(strong
growthwithlowinflation)andfinancialstability
Easymoneyjustifiedbyslowrecoveryhasledtoassetreflationthatcan
endupinassetbubbles
Fedview:twotargetsandtwoinstruments:monetarypolicyfor
economicstabilityandmacropruforfinancialstability/avoidingbubbles
Butmacro-prumaynotworkasuntestedandhasntworkedinthepast:
onlyinstrumentthatentersinallcracksofthefinancialsystemisthe
interestrateinstrument
Ifmacroprudoesntwork:damnifyoudoanddamnifyoudontas:
Slowexitgivenweakrecoverycouldcausethemotherofallboom/bubblesthatwill
eventuallygointoabust/crush
OR:
Ifmacroprudoesntworkandmonetarypolicyisthenusedtoprickthebubbleriskof
abondmarketroutandhardlandingoftherealeconomy

Eurozoneoutlook:lesstailrisksbut
fundamentalproblemsunresolved
TherecoveryoftheEZaftertheGFCwasweakerthanin
theUSgivenweakerpolicystimulus
TheEZrelapsedinadoublediprecessionin2011-2013
TheperipheryoftheEZenteredaseverefinancialcrisis
withserioussovereignrisks.Sevencountriesintroubleand
fivebailedout(Greece,Ireland,Portugal,Spain,Cyprus)
ProblemswereinitiallyintheprivatesectorinSpainand
Ireland;inthepublicsectorinGreece,PortugalandItaly
DoomloopbetweentheEZbanksandthesovereigns
Atthepeakofthecrisisinsummerof2012riskofGrexit,EZ
break-up,lossofmarketaccessbyItalyandSpain

EZtailrisksarelowertoday
EZtailrisksarelowertodaythanksto:
Draghiswhateverittakes
OMTprogram
ESMprogramontopofEFSFandEFSM
Beginningofabankingandfiscalunion
StartofECBQEin2015
GermanyrealizingthatEZisalsoapoliticalproject
thatrequirespatience:avoidGrexit
Austerityandreformssupportedbybailoutfunds,
bothfiscalandmonetary(ECB)

SomePositivesintheEZToday
Returntogrowthevenifrecoveryisanemic/uneven
ECBsQEandCreditEasing;lowereuro,lowerlong
rates,higherstockprices;loweroilprice
Alotoffiscaladjustmentisdoneandlessfiscaldrag
ahead.EUacceptedfiscalflexibility
Beginningofstructuralreformsinperiphery
Internaldevaluation(fallinUnitLaborCoststo
increasecompetitiveness)insomeperiphery
Austerity/reformsinexchangeofliquidityandbailout
fundsholdingpolitically.

TheNegativesintheEZ
Lowpotentialgrowthgivenslowreforms
Recoveryafterrecessionisfragile/weak/uneven.
Publicandprivatedebtsarestillhighandrising.
Debtsustainabilityissue
Lossofcompetitivenesshasnotbeenfully
reversed.Improvementintradebalancesis
partlycyclical(recession)
Stillrecoveryofcreditaftercreditcrunch
Stillfiscaldragevenififdiminished

TheNegativesintheEZ
EZisstillatriskofdeflation
Amonetaryunionrequiresabanking,fiscal,
economicandpoliticaluniontobeviableinthelong
run
Somelimitedprogressonthebankingunion
Austerityfatigueintheperipheryandbailoutfatigue
inthecore
Politicalrisksintheperipheryarehigh
ECBonlygameintownasfiscalpolicyis
constrained

Draghinomicslookslike
Abenomics
Draghi:Slowgrowthdependsalsoonaggregate
demandnotonlyonsupplyconstraints(slow
reforms)
Threearrows:QEandCE;fiscalstimulusinshort
runwithcontinuedmediumtermconsolidation;
structuralreforms
ECBdoesitsshare:QEandCE
Thefiscalstancewillremaintoorestrictive
AsymmetricadjustmentofEZcontinues
Structuralreformsaretooslow

Abenomicsispartiallyworkingin
Japanbutmanyrisksremain
Abenomicshaspartiallyworked:
Deflationending
Growthpickingup
Yenweakerandstockmarketstronger
Openissues:
Willstructuralreformsandtradeliberalizationthat
increasepotentialgrowthbeimplementedfaster?
Theriseoftheconsumptiontaxin2014ledtoQ2
negativegrowth;canJapanstomachthe2017hike?
IsJapanspublicdebtsustainableinthelongrun?
WilltheBoJincreaseQEthisyearorin2016?

China:Hardlandingorsoftlanding?
WillChinaexperienceasoftlandingorhardlandingora
bumpy/roughlanding?
Chinasgrowthisunbalanced/unsustainable:toomuch
savings,investment&exports;toolittleconsumption
Willthestructuralreformsbeimplementedfastenoughto
rebalancegrowth?
Reformsareslowerthanoptimalanddesirableasleadership
isdividedandresistancetochange
Willthestockmarketkeeponcrashing?
WilltheRMBsharplydepreciate?
Growthmayslowdownto6.5%in2015,6%in2015and5%
bytheendofthedecade

MajorEsintheglobaleconomy:
The2010-2015period

Economy
Energyandoilprices
Exchangeratesandexternalimbalances
Euro/Eurozone/ECB
EmergingMarkets
EastasMiddleEast
EastasEastAsia
Earnings/Equitymarkets

Economy(global)duringtheGlobal
FinancialCrisis(GFC)
TheUSandtheglobaleconomyexperiencedin2008-2009
theirworstrecessionindecades
Thehousingandmortgagebustledtoaneconomywide
recessionintheUSastherewerespilloversofthehousing
recessiontoothersectorsoftheeconomy(autos,
manufacturing,consumerdurables)
Theliquidityandcreditcrunchthatstartedinthesub-prime
mortgagemarketspreadtoallcreditandfinancialmarketsas
thiswasnotjustasub-primeproblem:sub-prime,nearprime
andprimemortgages,commercialrealestatemortgages,
creditcards,autoloans,studentloans,leveragedloans
AlsotheUSconsumers(consumptionis70%ofaggregate
demand)wereshopped-out,saving-lessanddebt-burdened

Economy(intheGFC)
Thiswasbothaliquiditycrunchandacreditcrunchthedrivenby
serioussolvencyproblemsgivenover-leverageofhouseholds,
financialinstitutionsandpartsofthecorporatesector
ThemyththattherestoftheworldcoulddecouplefromtheUS
recessionwasshatteredin2008:therewasmassivere-coupling
firstinfinancialmarketsandthenintherealeconomy.
Recessioninmostadvancedeconomies(US,Eurozone,Japan);
recessionormassivegrowthslowdowninemergingmarket
economies)
TheGreatRecessionof2008-09bottomedoutinlate2009when
mosteconomiesstartedtorecover.ButtherecoveryinDMsince
thenwasbeenanemic,sub-par,belowtrend,aU-shaped
recovery.Strongerin2016asdeleveragingmoreadvanced?

Causesofthehousing/credit
bubbleandbust/crisis
Easymonetarypolicy(theFedtightenedtoolittletoo
late)
Laxsupervisionandregulationofthefinancialsystem
Excessiverisktakingandleverageofthefinancialsector
givendistortedincentives
Globalcurrentaccountimbalancesandglobalsavings
glut
Irrationalexuberanceandanimalspiritsleadingto
bubbles
Governmentsubsidizationofhousing(taxbenefits,role
ofFannieandFreddie,CommunityReinvestmentAct)
Distortedincentivesofratingagencies

Energy
US/globalrecessionshavebeenassociatedwithoilpricespikes
(1973-74,1979-80,1990-91,2000-2001).
In2008oilpricesspikedagain.Thisincreaseinoilpriceswasnot
drivenbyeconomicfundamentalsbut,inpart,byspeculation
Thehighoilpriceswereoneofthefactorsthattriggeredthe
globalrecessionastheyrepresentedanegativetermsoftrade
andrealdisposableincomeshockforoilimportingeconomies
(US,Eurozone,Japan,China,etc.)
Oncetheglobalrecessionemergedoil,energy,commodityprices
collapsed(oildownto$30).
Lateroilpricesrecoveredandtill2013theywerearound$100as
theglobalrecovered.
Butin2014-15oilpricescrashedgivensupplyshock(shale
revolution)andweakdemand
Impactoflowoilongrowthandinflation

ExchangeratesandExternal
imbalances
ThestrengthoftheU.S.inthe1990srelativetoEuro,Yenand
othercurrenciesledtoalargeagrowingcurrentaccountdeficitin
theUSastheUSlostcompetitiveness
After2000,theUScurrentaccountdeficitworsenedfurtherasthe
fiscaldeficitsmushroomed(twindeficits)andastheprivate
savingsratesankclosetozero
Thisledtothedebateonwhetherthiscurrentaccountdeficitwas
sustainableorwasgoingtoleadtoacrashinthevalueoftheUS
dollarand/oraspikeinUSinterestrates(dollarhardlanding)?
Thedollarstartedtodeclinein2002-2004,especiallyrelativeto
theEuro,butthenitsharplyappreciatedagainin2005asinterest
ratesandrealgrowthdifferentialsfavoredthe$relativetothe
euroandtheyen.
Butthedollarresumeditsfallin2006-07whentheUShada
growthslump,afinancialcrisis,andtheFedcuttheFedFunds
ratestartinginthefallof2007

ExchangesratesandExternal
imbalances
Theglobalcurrentaccountimbalanceswereoneofthecauses
oftheglobalfinancialcrisis
Thedollarstartedtoappreciateduringthefinancialcrisisof2008
aspanickedinvestorswereseekingthesafetyofdollarassets.
Whenriskisoffthedollargoesup
TheUStradedeficitalsostartedtoshrinkasthefallin
consumptionledtoafallinimports.Butwasthisimprovement
mostlycyclicalorstructural?Isshalegasagamechangerforthe
U.S.externalbalance?
Theriskofadollarcrashifforeigninvestorswhofinancedthe
UStwindeficit&becameconcernedaboutthesustainabilityof
suchdeficitsisnowlowerastheUStwindeficitshavebeen
shrinking
Thedollarroserapidlysincemid2014asgrowthrecoveredand
theFedisexpectedtoexitZIRP.Impactongrowthandinflation

Europe/Euro/ECB(2000-2012)
GrowthwassluggishinEuropeinthe1990srelativetothe
U.S.givenstructuralimpedimentstogrowth
RecoveryofEuropeangrowthafter2005
TheEuroshowedsignificantweaknessrelativetotheUS
dollaruntilmid2002astheEurozonegrowthwasweakerthan
USgrowth.
TheEurothensharplyappreciateduntiltheendof2004(by
about40%),andagainin2006-07(afterabriefdollarrallyin
2005)
During2008notonlyEuropedidnotdecouplefromtheUS
crisisbuttherecessionintheEurozonewasmoresevere
thanintheUS
Thiswasinpartduetothefactthatthepolicyeasingin
Europe(monetaryandfiscal)wasnotasaggressiveasinthe
US

Europe/Euro/ECB
FiscalstimulusinEurozonewasweakerbecausemanyofthe
membercountriesstartfromlargefiscaldeficits,largestocksof
publicdebtandbanksthataretoobigtofailandtoobigtobe
saved
ECBeasingduringandaftertheGFCwasweakerthantheone
oftheFedastheECBhasasinglemandateofpricestability.
TherecoveryofgrowthintheEZwasevenmoreanemicthan
theoneoftheUSgivenlesseasymonetarypolicy,earlyfiscal
tighteningandunresolvedbankproblems
SovereigndebtproblemsintheEZandtheEZcrisis
PotentialgrowthfortheEurozoneislow0%to1.5%inthe
periphery-andpossiblyfallingbecauseofstructuralrigidities.
EZatriskofneardeflationnow.
WhataretheprospectsforstructuralreformsinEurope?
WillQEpreventdeflationandrestorestrongergrowth?

Emergingmarketeconomies
(2000-2013)
Emergingmarket(EM)economiesexperiencedmany
economicandfinancialcrisesinthe1994-2002period
2001wasadismalyearforemergingmarket(EM)
economies.TheslowdownofgrowthinUSandG7,the
techbustandthereductionofflowsofcapitalto
emergingmarketsledtoasharpslowdownofgrowthin
manyemergingmarkets.
OutrightcurrencyandfinancialcrisesemergedinTurkey
(February2001)andArgentina(December2001).In
2002,severepressuresmountedinUruguayandBrazil;
Uruguayexperiencedaseverefinancialcrisisin2002;
Brazilbarelyescapedafinancialcrisisaselections
loomedinlate2002butthenitrecoveredafterLula
followedmoderatepolicies.

Emergingmarketeconomies
Emergingmarket(EM)economiesgrowthrecoveredsharplyin2004,
especiallyinAsiabutalsoinLatinAmerica.Importantroleofmacro
andfinancialreformsaftertheEMcrisesinthisgrowthrecovery
2004-2007wereexcellentyearsforEMsasglobalconditionswere
ideal:globalgrowthwashigh,globalinterestrateswerelow,
commoditypriceswerehighandglobalinvestorsriskaversionlow
(searchforyield).
Thefinancialcrisistoamassivere-couplingfinancialandreal-of
emergingmarketswithadvancedeconomies:manyemergingmarkets
enteredarecessionandothershadamassivegrowthslowdown.
FinancialandeconomiccrisesinEmergingEurope
TherecoveryofgrowthinsomeemergingmarketsChina,India,
someotherpartsofAsia,BrazilandpartsofLatinAmericawas
earlierandfasterthanadvancedeconomiesastheirmacroand
financialfundamentalsarerobust.AV-shapedrecovery
Butin2013-15manyEMfacedslowdown.WillFedexitleadto
anothertantrum?WillChinasslowdownhurtalottheEM?

EastasinMiddleEast
Oilpricesarelowtodaygiventheshalerevolution.
ButturmoilintheMiddleEast(theSyriaandIraqsecurity
situation;theArabSpring;tensionsbetweenIsraelandits
neighbors)couldaffectoilpricesifthefearpremiumrises
followingthreatstosupply.
TheMiddleEastisanarcofinstabilitythatgoesfromthe
MaghreballthewaytoAf-Pak.
TheMiddleEastandoilpriceshavebeenamajorsourceof
geo-politicaltensiononglobalmarkets.
PreviousUSandglobalrecessionshavebeenassociated
withstagflationaryoilpriceshocks
Butsofarmarketshaveignoredthegeopoliticalrisksinthe
MiddleEast?Why?Willthischangeornot?
Whatistheoutlookforoilprices?Willtheyremainlow?

EastasinEastAsia
Chinaexperiencedrapideconomicgrowthandoverheatingin
the2003-2008period
TheGFCledtoamassivegrowthslowdowninChinainthefall
of2008.ButtheaggressivepolicyreactionofChinaledtoa
robustgrowthrecovery.ButChinarisksnowahard/rough
landingunlessitchangesitsgrowthmodelfastenough
IndiasdynamisminITcontributedtohighgrowthinlastdecade.
ButIndianowfacesseverefiscalproblemsandneedformajor
structuralreforms.Growthsloweddownsharplyafter2012.Will
thenewModigovernmentacceleratereformstoboostgrowth?
East AsiagrowthstronglydependsonChinaandtheUS.A
numberofAsianEMmaybeatriskgivenChina
Japansrecessionin2008-09wasverysevereandtherecovery
anemic.WillnowAbenomicsworkornot?
Asiageopoliticaltensions:WillChinarisepeacefully?

Earnings/Equitymarkets(2004-2009)
EquitymarketsintheUSandgloballydidwellinthe20062007givenhighglobaleconomicgrowth
Highearningsgrowth,muchimprovedcorporatebalance
sheets,easymonetaryconditionssupportedequities
ProfitssharplyincreasedasashareofGDP
ButduringtherecentglobalfinancialcrisisUSandglobal
equitiessharplyfell(byover50%btwthefallof2007and
March2009)withabearmarketthatexperienceda
numberofbearmarketrallies.
SinceMarch2009amassiverallyinU.S.andglobal
equitymarkets(over150%).Isitexcessiveandatriskofa
significantcorrectionorboundtorisefurther?
Somedisconnectbetweenslowrecoveryofthereal
economiesandrapidriseinequityprices.

Earnings/Equitymarkets
(2010-2015)
BackgroundonUSequitymarketsinthe2000-2015period:
TheU.S.andglobaleconomicslowdownin2001ledtoasharpslowdownofearningsand
underperformanceofequitymarkets(ontopofthedotcombustandNasdaqcollapsein2000).
Equitymarketsalsounderperformedin2002asthestockmarketrallyafterthe9/11dropwas
excessiveandbasedonoveroptimisticexpectationsofgrowth.
Stockmarketsslumpedagaininthefirstquarterof2003astheconcernsaboutawarwithIraq
ledtorenewedriskaversion.
Buttheythenrecoveredsharplyafterthewarin2003asmarketsstartedtoexpectasustained
economicrecoveryandasharppick-upinprofitsandearnings.
Butstockindexesremainedmostlyflatonaveragein2004andevenin2005and2006(with
onlyamodestuptrendsince2004)evenifcorporatebalancesheetshaveimprovedsharply
(withdebtde-leveraging)andearningsgrowthhasbeensustainedin2004-2006.
EquitymarketsintheUSandabroadralliedsharplyin2006-2007
Bearmarketinequitiesstartingwiththefinancialturmoilinthefallof2007
BottomofthebearmarketinMarch2009andthenrapidrecoverythrough2014withsome
episodesofriskofffollowedagainbyriskon.
In2013sharprallyofUSequitiesthatcontinuedataslowerpacein2014.
IstheUSstockmarketovervalued?Willacorrectionoccurorwillitcontinuetotrendupandby
howmuchin2016andbeyond?
HowmuchcontagionfromChinaasinthesummerof2015whenfirstcorrectionsince2011
occurred?Uncertainoutlookforearningsin2016

LinkagesbetweentheU.S.andtherestof
theworldoccurviavariouschannels
Trade
CapitalflowsandFDI(Europe,Japan,Emerging
markets)
ValueoftheUSdollar
USmonetaryandfiscalpolicy
Globalstockmarketsandfinanciallinks
Developmentsinoilandcommoditymarkets
Politicalshocksandrisks
Globalinvestorsandcorporateconfidence

Fedpolicy:2000-2015
TheFedreducedtheFedFundsrates11timesin2001,by
475pbstoarateof1.75%astheeconomyenteredarecession.
FalteringintheUSrecoveryinthefallof2002ledtheFedtocut
theFedFundsagain,downto1.25%inNovember2002anddown
to1%inJune2003asajoblessrecoveryemergedduringthewar
withIraq.
In2004,asgrowthofoutputandjobspickedupandinflation
startedtoincrease,theFedstartedtoincreasetheFedFundsrate
in17consecutivestepsbringingitto5.25%byJune2006and
thenpausinginAugust2006.
TheriskofaUShardlandingandthemarketturmoilinthe
summerof2007ledtheFedtocutratesstartinginthefallof2007
from5.25%toeffective0%in2008
Massivequantitativeeasingin2008-13during/afterthefinancial
crisis:unconventionalmonetarypolicy.QEtaperingstartedinDec
2013.LikelyZIRPexitin2015

USfiscalpolicysince2008
Fiscalstimuluspackagein2008astheeconomyenteredarecession
Assecond$900billionfiscalstimuluspackagelegislatedinearly2009
Deficitfor2009rosetobe$1.4trillionbutisnowmuchlower($450bn)
or3%ofGDPin2015
Fiscalpathdeficitanddebt-isclearlyunsustainableasoverthenext
decadedeficitswillriseagainunlessentitlementspendingisreformed
(SocialSecurityandMedicare)
Difficultissueofwhentoexitfromthefiscalstimulus.TheU.S.
postponedtill2012butseriousfiscaldragin2012-13givenspending
cuts/sequesterandriseintaxes
2013showdownongovernmentshutdownanddebtceiling
WillfiscalfightsinCongressresumeinfall2015?
Orwillanothercompromiseonthesequesterbeachievedfor2016and
beyond?

Globalcurrentaccountimbalances
Aretheglobalcurrentaccountimbalances(stilllargedeficitintheUS
andfragileEM,largesurplusesinEurope,Chinaandsomeemerging
marketeconomies)sustainableovertime?
IstheUScurrentaccountdeficitandexternaldebtaccumulation
sustainable?Itisshrinkingbutmaybetooslowly?
Willtheadjustmentofglobalimbalancesbeorderlyordisorderly?
Istheglobalcurrentaccountadjustmenttoasymmetricasdeficit
countriesneedtoretrenchwhilesurpluscountriesarentreducingtheir
surpluses?Isthisdeflationaryfortheworld?
Howwillthemajorcurrencies($,YenandEuro)perform?Willthedollar
weakenorstrengthenovertime?
Istherecent2104dollarstrengthsustainableandhowwillitaffectthe
USexternalbalance,growthandinflation?
IstheriskofahardlandingoftheUSdollar-especiallyiftheforeign
creditorsoftheUSgettiredoffinancingtheUStwinfiscalandcurrent
accountdeficitsreducedasthetwindeficitsarenowsmaller?
WillEMwithexternaldeficitexperienceasuddenstop/crisis?

Globaldeflationorinflation?
andcommodityprices
Until2007andearly2008therewasconcernaboutglobalinflationas
globalgrowthwasrobust,emergingmarketeconomieswereoverheating
andexperiencingdoubledigitinflation(30pluscountries)andas
commoditypriceswererising
ButoncetheUSrecessionbecameglobalinthesecondhalfof2008
seriousdeflationarypressuresemergedintheglobaleconomybecauseof
slackingoodsmarkets,slackinlabormarketsandsharplyfalling
commodityprices
Byspringof2009economiesexperiencingactualdeflationsincludedUS,
Eurozone,Japan,Chinaandanumberofotheradvancedeconomiesand
emergingmarkets
Willinflationreturnastheglobaleconomicrecoverymayacceleratein
2016andbeyond?Oraredisinflationaryforcesstronger?
WillinflationsurprisetotheupsideintheUSandcausetheFedtobe
behindthecurveregardingexitfromzerorates?
Shouldweworrymoreaboutinflationoraboutdeflationandoverwhich
timehorizonshouldweworrymoreaboutoneortheother?
Isthecommoditysuper-cyclereallyoverandwhy?

Someofthecuttingedgeissues(andjargonterminology
used)ininternationalmacropolicydebates
Whydidthesubprimecrisisleadtoawidercredit crunch?
Wasthecrisisduetoaliquidity crunchoracredit crunch/solvency
crisis?
Whatistheriskofaanothersystemic crisisandwhatfactorstrigger
one?
Whatcausesasset bubbles?Whatcauseshousing bubbles and bust?
Howshouldmonetarypolicyreacttoassetbubblesandasset bubbles
bursting?Shouldcentralbanksaddressbubbleswithariseininterest
ratesorviamacro-prudentialsupervisionandregulation?
Shouldweworryaboutdeflationorinflation?
Howwillcentralbankexitunconventional monetary policies (ZIRP,QE,
CE,FG,NDR)?
Whatistheriskofsovereign debt crises indevelopedmarkets?
Whyisincome and wealth inequality risingandwhatistheimpactof
it?
Areadvancedeconomiesatriskofsecular stagnation andwhy?

Someofthecuttingedgeissuesin
internationalmacropolicydebates

Shouldweworryaboutstagflation or stag-deflation?
Areglobal external imbalances sustainableornot,andforhowlong?
Aretwin fiscal and current account deficitssustainableinDMandEM?
Shouldweworryaboutasset protectionism and restrictions to FDI?
Shouldweworryaboutcapital controls on inflows and outflows?
Shouldweworryaboutresource protectionism?
Whatisthefutureofoffshore outsourcing?
IsthetradeliberalizationDoharoundasdeadasDodo?
Isfreetradecompatiblewithflexibleexchangeratesordoesgreater
tradeintegrationrequiremanaged or pegged exchange rates?
Isglobalizationatriskofreversal?
Shouldwebeoptimistorpessimistaboutthepaceoffuture
technological innovation?
Willrobots/automationreplacemostjobs?
Whatexplainstherise in inequality andwhatcanwedoaboutit?

Someofthecuttingedgeissuesin
internationalmacropolicydebates

Arehighly-leveraged institutionsandhedgefundsasourceof
systemic risk?
Whatistheriskofnewasset and credit bubbles?
Ishousing frothy and bubbly insomeeconomies?
Willmacro-prubeeffectiveinensuringfinancialstabilityornot?
Isoffshore outsourcingathreatorabenefitfortheglobaleconomy?
WilltheBRICsdominatetheworldeconomyinthenextdecades?
Isthebalance sheet approachtheappropriateframeworkfor
thinkingaboutfinancialcrisesinemergingeconomies?
Arecrisesduetofundamentalsorself-fulfilling liquidity runs?
Whatexplainssudden stopsandreversalsofcapitalinflows?
Whatexplainsthejointeruptionofcurrency, sovereign debt,
systemic banking and systemic corporate crises?

Someofthecuttingedgeissuesin
internationalmacropolicydebates

WhatistheappropriateformofPSI/bail-in/burden-sharingincrisis
resolution?
Doweneedaninternational lender of last resort(ILOR)?
Whatexplainsinternational contagion?
Howtodealwithliability dollarizationandoriginal sin?
Doweneedaninternational bankruptcy regimeforsovereigns?
Whatisthemostdesirablesovereign debt restructuring mechanism?
Doemergingmarketssufferoffear of floatingandifsowhy?
Isunilateraldollarizationthewayofthefuture?
Aremonetary unionsfeasiblewithoutbroaderbanking,fiscal,economicand
politicalunions?
Issterilizationofexcessivecapitalinflowsfeasibleanddesirable?
Whatisthedesirable reform of the international financial architecture?
WilltheUSdollarremainthemainglobal reserve currency?
WilltheChineseRMBemergeasamajorglobalcurrency?

SourcesofInternational
MacroeconomicInterdependence
amongEconomies
Macroeconomicsisinternationalgiventhe
increasingeconomicinterdependenceamong
countriesandtheincreasedglobalizationoftrade
andfinance.
Tradelinks:
Incomeeffectsonimportsandexportsofgoods
andservices
Directandindirecttradelinks
Exchangerateeffectsontrade

Financialchannelsof
interdependence
Assets/Liabilitiestradedinternationally
Stocks
Bonds
Derivativeinstruments(intheGFC)

Internationalfinancialmarkets/intermediaries:

Banks
Capitalmarkets(stock/bond/moneymarkets)
Foreignexchangemarkets
Commoditiesmarkets

Interdependencechannelsvia
commonshocksandFDI/MNCs
Commonsectoral/externalshocks
Commonoilandcommodityshocks
Techsectortechnologyshockinthemid1990sand
bustin2000-2001
HousingbubblesintheUSandothercountries;and
theirbustin2007-09
Globalcreditcrunch

ForeignDirectInvestment(FDI)/Multinational
Corporations(MNCs):
Realinvestment(FDI,M&A)
Output/productionlocationdecisions

InterdependenceviaPolicyLinks
Domesticeffectsofmacropolicies
Internationaleffectsofdomesticpoliciesifacountryislarge
(US,Europe,Japan)
Globalfinancialcontagionof2008-2009
FinancialcontagionfromChinarisksin2015

Internationaleffectsofdomesticpoliciesevenifacountryis
small(internationalcontagion):
MexicoTequilaeffectin1995
TheAsianfever/flu
TheRussianvirus(contagiontoemergingmarketsBrazil,LatAm-
andadvancedmarketsLTCM&UScapitalmarkets)
TheTurkishinfluenzain2001
Greece,Iceland,Cyprusin2010-12
Grexitriskin2015


ManyFinancialCrisesinEmergingMarkets
andG7Economiesinthelasttwodecades
Currency/FinancialCrisesinEmergingMarkets:
1980sdebtcrisisinLatinAmerica
Mexico,EastAsia,Russia,Brazilinthe1990s;
TurkeyandArgentinain2001;Uruguayin2002;Brazil
mini-crisisin2002;DominicanRepublicin2003
Marketturmoil(mini-crisis)inEMsinMay-June2006
MassivecontagionofUSfinancialcrisisof2008-2009to
emergingmarketseconomiesmarketsandeconomic
growth.Avoidanceofoutrightfinancialcrisesgivenstronger
fundamentals
EMminicrisisof2013-15?Willitworsen?IsChinaatrisk
ofahardlanding?

Crisesandfinancialstressesin
Advanced/G7Economies
S&LcrisisinUSinearly1990s
Corporate/BankingcrisisinJapanin1990safterbursting
ofthe1980sassetpricebubble
EuropeanMonetarySystem(EMS)currencycrisisin
Europein1992-93(Italy,UK,France,Sweden)
BankingcrisisinFinlandandSwedeninearly1990s
BondmarketcrashintheUSin1994astheFed
unexpectedlytightenedmonetarypolicy.
SharpfallofthevalueoftheUSdollarin1994-1995
LTCMcrisisin1998andseizureofU.S.capitalmarkets

Crisesandfinancialstressesin
Advanced/G7Economies
BurstingoftheUSassetpricebubbleinequitymarketsin20002002;ITanddot.comcrash.
UScorporateandaccountingscandalsin2002-2003(Enron,
Sarboxlegislation,etc.)
GM-Forddowngradein2005andturmoilincreditderivatives
markets
Equitymarketturmoilinthespringof2006duringtheinflation
scare
Housingbustandsub-primecrisisintheUS(2006-2008)
USandglobalfinancialmarketsturmoilandvolatilitystartinginthe
summerof2007
Globalfinancialcrisisandrecessionof2008-2009
Eurozonecrisisof2010-2013
Riskofnewasset/creditbubblesin2014-15&beyond?

Majormacroandfinancialeventsofthelast30
years:AdvancedEconomies

1987:GreenspanbecomeschairmanoftheFed.Stockmarketcrashinthe
USin1987.
S&L(SavingandLoans)financialcrisisinthelate1980s;evidenceofacredit
crunchintheUS.
USandglobalrecessionin1990-91duringtheGulfWar.
PersistentstagnationofJapaneseeconomyinthe1990s(4recessionsinthe
1990sdecade)aftertheburstingofthe1980sassetbubble
CurrencycrisisintheEuropeanMonetarySystemin1992-93
EuropeanMonetaryUnion(1999introductionofEuro)andmediocre
economic/growthperformanceofEuropeinthe1990s
LargeswingsinthevalueofG3currencies($,Yen,Euro)
Globalfinancialcrisisin1998followingRussiancrisisandLTCMcollapse
NewEconomy,internetandtechnologyboom:theU.S.boomyears(19952000):highgrowth,lowinflation,highproductivitygrowth,lowunemployment
rate,boominequitymarkets,budgetsurpluses,strongdollar,largecurrent
accountdeficits.
BustoftheITbubblein2000-2001;sharpfallofinvestmentleadingto
economicslowdownintheUS.

Majormacroandfinancialeventsofthelast30
years:AdvancedEconomies

Theoilshockin2000contributingtotheglobalslowdown
Fedtighteningofmonetarypolicybetweenmid1999andmid2000astheeconomywas
overheating.
USslowdownandrecessionandglobalslowdownin2001;itstartedbefore9/11butwas
exacerbatedbyit.
ThirdandfinalstageofEMU(Eurointroduction)startedin2002.
AdefactoBrettonWoodsIIregimesince2001asChinaandAsiaeffectivelypegged
theirexchangeratestotheU.S.dollarthroughaggressiveforeignexchangeintervention.
TentativeU.S./globalrecoveryinearly2002thatsloweddowninthespringandinthe
fall.SlowgrowthinH1-2003(givenIraqwaruncertainty);U.S.andglobalrecoveryin
secondhalfof2003andQ1:2004butwithpoorjobgrowth(joblessrecovery).Higher
USandglobalgrowthin2005-2006
BurstingoftheUShousingbubbleandahousingbustsincemid2006.Sub-prime
mortgagecrisisintheUS(2007)
USandglobaleconomicandfinancialcrisisof2008-2009
Anemic,sub-par,belowtrendU-shapedrecoveryinDMin2010-2013
DoublediprecessioninEurozone,UKandJapanin2011-2012
Strongerrecoveryinsomeadvancedeconomiesin2015.EZrecovery
Summer2015financialturmoilgivenChinahardlandingrisks
Riskofnewasset/creditbubblesasexitfromZIRPistooslow?

Majormacroandfinancialeventsofthelast
30years:Emergingmarkets

LatinAmericandebtcrisis(inthe1980s)anditssolution(BradyBonds)in
thelate1980sandearly1990s
Largecapitalflowstoemergingmarketsinthe1990-95period.
TransitiontoamarketeconomyinCentralandEastEuropeancountries.
Mexicancurrencycrisisin1994-95
Asiancurrencyandfinancialcrisis(Thailand,Indonesia,Korea,Malaysia)in
1997-98
Russianfinancialandcurrencycrisis(8/98)anditscontagiontoemerging
marketsandadvancedeconomiesfinancialmarkets(LTCM)
CurrencycrisisinBrazilin1/99
FinancialturmoilandIMFrescuepackagesinArgentinaandTurkeyin
November-December2000
Sovereigndebtrestructuringsafterpartial/fulldefaultinEcuador,Russia,
UkraineandPakistanin2000-2001
TurkishcurrencyandfinancialcrisisinFebruary2001

Majormacroandfinancialeventsofthelast
30years:Emergingmarkets

Argentinacurrencyandfinancialcrisisanddefaultof2001-2002
Financial/currencycrisisinUruguayin2002
RiskofafinancialcrisisinBrazilasOctober2002electionswerelooming.Financial
recoveryaftertheelection.WeakeconomicperformanceofLatinAmericain2003with
growthrecoveryin2004-2005.
Accessionof10emergingmarkets(mostlytransitioneconomies)totheEuropeanUnionin
2004.
Rapidgrowthofemergingmarketeconomiesin2004-2006onthebackofmacro/financial
reformsandbenignglobalconditions(highglobalgrowth,highcommodityprices,lowG7
interestrates).Internationalinvestorsrediscoveremergingmarkets.
BoomincommoditypricesexportedbyEMs.
2006-2007:AfricaasthenewEMsgrowthstoryandassetclass?
TurmoilinEMfinancialmarketsinMay-June2006,especiallyforcountrieswithexternal
vulnerabilities
BubblyequitymarketsinEMespeciallyinChina,IndiaandGulfstates
ContagionoftheUSfinancialcrisistoemergingmarketeconomiesin2008-2009.
StrongV-shapedrecoveryofEMin2010-2012givenstrongerfundamentals
SlowdownandfinancialpressuresinEMstartingin2013andinto2014-15:slowdownof
China,endofcommoditysuper-cycle,Fedtalkabouttapering,policiesreducingpotential
growth
RisksoffinancialcrisesinfragileEMin2015-2016?