Ian Hurst

Financial Crises, Regulation and Growth

The paper discusses the effects on growth of a systemic banking crisis as a result of debt defaults. These effects will come from the impact of credit rationing on consumption and credit and from the impacts of a significant rise in the spread between lending and borrowing rates for both producers and consumers. The analysis uses the dynamic stochastic general equilibrium version of the National Institute global model. The paper also investigates the impact on output of a permanent, regulation induced, rise in margins in the financial sector, taking into account the impacts of regulation on equity market valuations.

German Monetary Union: An historical counterfactual analysis

Abstract This paper views German Monetary Union as a sequence of large asymmetric shocks to the European economies. As such it can be analysed with a large, new-Keynesian macro-econometric model of the relevant economies such as NiGEM. The ‘news’ in the sequence of shocks is assessed by analysing contemporary, NiGEM based, forecasts, and important events are then ‘peeled-off’ in reverse order. The resulting counterfactual history analyses the effects of the collapse of the Soviet economy on the EC and Scandinavian economies, and it is argued that the recession in countries such as Finland was not primarily caused by trade effects. The costs of support programmes for East Germany are then removed, creating a negative fiscal shock. Finally the paper analyses the overall effects of the set of shocks. In each part of the counterfactual history, individuals from forward looking expectations and the authorities operate fiscal solvency rules and target monetary aggregates.

International monetary policy coordination: an evaluation using a large econometric model

Abstract We examine whether there is a case for coordinating monetary policy reactions across major economies. We undertake stochastic simulations on the National Institutes Global Econometric Model (NiGEM), to evaluate independently set monetary policy where domestic considerations remain the prime objective and we compare outcomes to a regime with a coordinated policy where domestic interest rates react to international conditions. We also demonstrate the asymptotic properties of the stochastic simulations and stress the robustness of our results.

Sustainable Adjustment of Global Imbalances

This paper uses NIESR’s global econometric model, NiGEM, to analyse possible adjustment paths for the US current account, if its current level of 6 per cent of GDP proves unsustainable. Nominal exchange rate shifts have only a transitory impact on current account balances, so any long-term improvement of the US current account balance would require a real and sustained reduction in domestic absorption, or a rise in foreign absorption. This could be effected through a sequence of exchange rate movements driven by a gradual rise in the risk premium on US assets. This would induce a permanent change in the real exchange rate, and would also reduce domestic absorption in the US due to a rise in real interest rates. Global policy coordination, which involved raising domestic demand in countries such as China and Japan, could speed the process of adjustment and ease the negative impact on the US economy.

Benchmarks and Targets under the SGP: Evaluating Safe Deficit Targets Using NiGEM

Fiscal pacts and automatic stabilisers are widely discussed in the policy debate. Pacts put bounds on borrowing, and the bounds have to be evaluated. We use our model, NiGEM, to set safe targets for European deficits. Although there are many issues to consider, we conclude that cyclically adjusted target deficits of I per cent of GDP would ensure that governments seldom had to borrow more than 3 per cent of GDP, especially if they stood ready to raise taxes when the deficit deteriorated either for reasons separate from cyclical developments or because supply shocks had occurred. Offsetting the automatic stabilisers when supply shocks occur is shown to help stabilise output volatility.