After a deep global recession, economic growth has turned positive, as wide-ranging public intervention has supported demand and lowered uncertainty and systemic risk in financial markets. Nonetheless, the recovery is expected to be slow, as financial systems remain impaired, support from public policies will gradually have to be withdrawn, and households in economies that suffered asset price busts will continue to rebuild savings. Risks to the outlook remain on the downside. Premature exit from accommodative monetary and fiscal policies is a particular concern because the policy-induced rebound might be mistaken for the beginning of a strong recovery. The key requirement remains to restore financial sector health while maintaining supportive macroeconomic policies until the recovery is on a firm footing. At the same time, policymakers need to begin preparing for an orderly unwinding of extraordinary levels of public intervention. Policies also need to facilitate a rebalancing of global demand, because economies that experienced asset price busts will need to raise saving rates, and there is a need to bolster potential growth in advanced economies, which has suffered as a result of the major financial shocks. Rising unemployment and setbacks to progress in poverty reduction pose social challenges that also must be addressed.
The global economy seems to be on the verge of recovery. The advanced economies, hit particularly hard by financial crises and the collapse in world trade, are showing signs of stabilization, driven mainly by an unprecedented public policy response. The shape of the recoveries will vary, however, with economies that suffered financial crises likely to experience weaker recoveries than those that were affected mainly by the collapse in global demand. The rebound in emerging and other developing economies is being led by a resurgence in Asia, most notably in China and India, fuelled by policy stimulus and a turn in the global manufacturing cycle. Other emerging economies are benefiting from commodity priceincreases, as we11 as from policy frameworks that are stronger than during previous crises. However, recovery in the Commonwealth of Independent States (CIS) and emerging Europe is likely to be difficult, especially for economies most affected by sharply falling capital flows and domestic financial sector turmoil.
The current crisis gives occasion to revisit an old question: should monetary policy be used to prevent asset price busts? The question has at least three aspects, each of which is addressed in this chapter. First, we examine the historical evidence in search of consistent macroeconomic patterns that could be used as reliable leading indicators of asset price busts. Second, we examine the role of monetary policy in the buildup to the current crisis. In particular, we assess the validity of accusations that policymakers created the current crisis by reacting insufficiently to growing inflation pressure or that they raised the likelihood of an asset price bust by placing insufficient weight on credit and asset prices when setting interest rates. Third, we consider whether the goal of monetary policy should be expanded beyond just the stability of goods price inflation, how this could be done, and the potential tradeoffs involved.
The global economy is beginning to recover from the most severe financial crisis since the Great Depression and the deepest recession since World War II. Global economic activity is starting to pick up, but financial systems remain impaired and domestic and external imbalances persist in many economies. The recovery is expected to be slow, and there are concerns about the prospect of long-term damage to the path of global output, as financial institutions and markets worldwide struggle to restore their ability to intermediate and unemployment rises to high levels. In this context, the aftermath of past financial crises may provide useful insights into the medium-term prospects for economies now in the midst of financial crisis and for the global economy.
Mr. William Lee, Mr. Jorge A Chan-Lau, Ms. Dora M Iakova, Mr. Papa M N'Diaye, Ms. Tao Wang, Ida Liu, Ms. Hong Liang, and Mr. Eswar S Prasad
This Occasional Paper provides an overview of the main challenges facing Hong Kong SAR as it continues to become more closely integrated with the mainland of China. Section I provides an overview of recent macroeconomic developments and the main policy issues in Hong Kong SAR. Section II examines various aspects of the ongoing integration with the mainland, and the associated implications for the structure of the economy, and for macroeconomic and structural policies. Section III examines the medium-term fiscal outlook under different policy scenarios and discusses alternative policy options to restore fiscal balance. Section IV reviews recent developments in the real estate sector and their macroeconomic impacts. Section V presents an econome tric analysis of deflation and its determinants. Section VI examines the factors behind, and the implications of, rising wage inequality in Hong Kong SAR. Section VII presents an overview of recent developments in the financial sector and provides an assessment of Hong Kong SAR’s prospects as an international financial center.
Hong Kong, Special Administrative Region (Hong Kong SAR) enjoyed impressive economic growth, high levels of income, and close-to-full employment for years until the Asian crisis of 1997 brought about the most severe recession in a generation. Following this, the economy rebounded in 1999 and 2000. Before sustained growth could take hold, however, the global slowdown in 2001 brought on another recession. After four quarters of negative or near-zero growth, the economy of Hong Kong SAR began to show signs of a pickup in the second half of 2002, although domestic demand remained weak. The outbreak of Severe Acute Respiratory Syndrome (SARS) disrupted economic activity once again in the second quarter of 2003. With the rapid containment of SARS, however, there are good prospects of a rebound in activity, supported by strengthening domestic demand and rising exports.
Hong Kong SAR’s economic ties with the mainland have strengthened since its return to Chinese sovereignty in 1997. Following the relocation of most of its manufacturing production to the mainland in the 1980s and early 1990s, Hong Kong SAR is going through another structural transformation as its economic integration with the mainland deepens in other dimensions. The recently signed Closer Economic Partnership Agreement (CEPA) has provided Hong Kong SAR-based businesses and professionals with access to mainland markets before broader market access to them is provided under China’s commitments to the World Trade Organization (WTO). Against this background, this section reviews the process of economic integration between Hong Kong SAR and the mainland, and the policy implications for Hong Kong SAR.
Fiscal policy in Hong Kong SAR has traditionally been conservative. The fiscal balance remained in surplus between FY1985 and FY1997, resulting in an accumulated fiscal reserve of about 35 percent of GDP in FY1997. In addition, fiscal policy had not been used as a countercyclical tool before the Asian crisis.1
In recent years, macroprudential policy has become an increasingly active policy area. Many countries have adopted it as a tool to safeguard financial stability, in particular to deal with the credit and asset price cycles driven by global capital flows. This paper reviews the use of key macroprudential instruments and capital flow measures in 13 Asian economies and 33 economies in other regions since 2000, and constructs various macroprudential policy indices, aggregating sub-indices on key instruments. Asian economies appear to have made greater use of macroprudential tools, especially housing-related measures, than their counterparts in other regions. The effects of macroprudential policy are then assessed through an event study, cross-country macro panel regressions and bank-level micro panel regressions. The analysis suggests that macroprudential policy and capital flow measures have helped curb housing price growth, equity flows, credit growth, and bank leverage. The instruments that have been particularly effective in this regard include loan-to-value ratio caps, housing tax measures, and foreign currency-related measures.