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MacroeconomicsMacroeconomics

Case Study: Economic Policy in the Current RecessionCase Study: Economic Policy in the Current Recession

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MacroeconomicsMacroeconomics

3. The Keynesian Model and its Policy Implications3.1. The Keynesian Theory

3.1.1. The "Keynesian Cross"3.1.2. The Keynesian Model with Capital Market

3.2. Short-run Business Cycle Fluctuations 3.2.2. Reduction of the Propensity to Invest3.2.1. Reduction of the Propensity to Consume

3.3. Fiscal and Monetary Policy in the Keynesian Model 3.3.1. Fiscal Policy

3.3.2. Monetary Policy3.4. The Long-run Implications of the Keynesian Model

3.5. Policy Conclusions 3.5.1. Practical Problems of Anti-cyclical Policy 3.5.2. Case Study: Fiscal Policy in Germany

3.5.3. Case Study: Economic Policy in the Current Recession

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3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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Actual GDP growth minus trend growth (right scale) Actual GDP Trend GDP

Business Cycle Germany(Real GDP based on Chained Volumes, Reference Year = 2000, Trend = Hodrick-Prescott-Filter)

Source: Eurostat, Own Calculations

Bn. €

www.rainer-maurer.com

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3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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Actual GDP growth minus trend growth (right scale)Unemployment Rate (left scale)

Unemployment and Business Cycle Germany(Real GDP based on Chained Volumes, Reference Year = 2000, Trend = Hodrick-Prescott-Filter)

Source: Eurostat, Own Calculations www.rainer-maurer.com

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Private Consumption in Current Prices, Billion Euro

Quelle: Statistisches Bundesamt

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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Gross Investment in Current Prices, Billion Euro

Quelle: Statistisches Bundesamt

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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➤ The expenditure account of GDP show the components of the demand for domestic goods:

Y = C + I + G + EX – IM

<=> BIP = Consumption

+ Gross Investment

+ Government Consumption

+ Exports

- Imports“Net Exports”

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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Exports ./. Imports in Current Prices, Billion Euro

Quelle: Statistisches Bundesamt

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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➤ As the data reveal, the current recession was mainly caused by a reduction of investment and export demand.

➤ The reason for the reduction of investment and export demand was the bursting of a speculative bubble on the US real estate market.

➤ The causal chain behind the development is relatively complex, as the following chart shows:

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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USA GermanyDecrease in Real

Estate Prices

Net Wealth Loss of Households

Reduction in Con-sumption Demand

Reduction in Investment Demand

Reduction in Demand for Consumption and Investment

Goods from Germany

Reduction in Credit Supply by US Banks

Loss of Credit Receivables of

Ger. Banks

Loss of Credit Receivables of

US Banks

German Consumption

Relatively Stable

Reduction in Credit Supply by Ger. Banks

Reduction in Investment Demand

Reduction of Export Demand

Reduc-tion of

Produc-tion in Ger-many

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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➤ Fiscal Policy Measures in Germany:➤ “Konjunkturpaket I” of November 2008 with a total volume

of about 100 Bn. €:

◆ Subsidization of building investment: energy saving investments

◆ Subsidization of investment in equipment: extension of write-off possibilities

◆ Extension of child allowances and other family support

◆ Increase of credit supply for midsize companies: Sonderprogramm KfW – Bank

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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➤ Fiscal Policy Measures in Germany:➤ “Konjunkturpaket II” of January 2009 with a total volume of

about 50 Bn. €:

◆ Reduction of income tax

◆ Reduction of health insurance allowances

◆ Additional Extension of child allowances

◆ Subsidization of private demand for cars (“Cash for clunkers”)

◆ Municipal investment program: Improvement of infrastructure

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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➤ Monetary Policy Measures:

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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➤ Geldpolitische Maßnahmen:

3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession 3.5.2. Case Study: Economic Policy in the Current Recession

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Main Refinancing Rate

Consumer Credits1)

Mortgage Loans1)

Corporate Credits2)

The Impact of the ECB on Credit Interest Rates of Commercial Banks

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3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession

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3. The Keynesian Model and its Policy Implications3. The Keynesian Model and its Policy Implications 3.5.2. Case Study: Economic Policy in the Current Recession