1 • 2012

Public sector sustainability and large stabilization measures: the need to stay well below the fiscal limit 

Despite massive fiscal measures in many countries to stabilize and revive aggregate economic activity from the depressed levels that prevailed in these economies, hard-hit by the global recession, the global economy is still struggling to reach a path of robust growth. Stabilization efforts have not been uniformly successful, with the consequence that differences among countries, especially within the euro area, have tended to widen as these economies have been subjected to increasing stress due to a sovereign debt crisis that is chipping away at the fundamentals necessary for recovery and growth.
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Financial accelerator through quantity rationing

All of the major financial crises, from the Great Depression of the 1930s through to Asia in the latter half of the 1990's and to the most recent one, clearly show how important the financial sector is for the smooth functioning of the aggregate economy. These crises also show how the financial sector can affect business in a very fundamental way. The influence of the financial sector for the behaviour of the aggregate economy is more often than not discussed under the concept of the "broad credit channel". The idea here is that frictions in the financial market tend to amplify and propagate to the future the effects of aggregate shocks and, consequently, that the broad credit channel presents itself as a natural candidate for explaining many of the salient features or stylized facts of business cycles, such as the high variance and output growth autocorrelations observed in the data relative to those of the shocks hitting the economy.
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Internationalisation of the renminbi and China's monetary policy

China has recently taken several steps towards more liberal capital flows and wider international use of the renminbi. As with previous economic reforms in China, the liberalisation of capital movements is relatively slow and gradual. China's current growth model is largely based on a high savings ratio and the channelling of savings via state-owned banks to various investment projects. Liberalisation of capital movements is almost inevitably linked with substantial liberalisation of China's financial markets, which could pose a risk to the current growth model.
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