Very low Ti an opportunity for public policies

‭Very low Ti: an opportunity for public policies‬ ‭ pportunity to reduce debt (because Ti is low) or to make I of LT to ensure a - sustainable future (I‬ O ‭whose yields exceed Ti). This - sustainable could also make it possible, in the long term, to repay‬ ‭the debt. But in CT, I do not respect European commitments.‬ ‭2 paths taken: 1) All = public debt reduction + wage rigor / price competitiveness of the E. 2)‬ ‭France = public debt to finance intelligent I - non-price competitiveness of the E.‬ ‭ )‬ d ‭Should public spending be‬ ‭reduced in France?‬‭Some data:‬ ‭Mandatory deductions France = 53% of GDP. We cannot increase them.‬ ‭Observation: increase in public spending does not come mainly from public employment or public‬ ‭I but mainly from social security (2/3 of the increase in spending) and local authorities.‬ I‭n Europe, you have to have more than I do but also manage certain unnecessary expenses.‬ ‭To know if you are correctly oriented:‬‭France strategy‬‭,‭2 ‬ 013‬‭:‭e ‬ fficiency‬‭frontier:‬ ‭ o reach the efficiency frontier in the diagram, we can either increase performance (therefore‬ T ‭same expenses but better) or reduce expenses.‬ ‭ he examples :‬ T ‭-‬‭Retirees‬‭(14% GDP): performance indicator broken‬‭down into: aggregate replacement rate of‬ ‭those over 65 years old / risk of poverty rate of those over 65 years old / inequality of income‬ ‭ istribution of those over 65 years old.‬ d ‭France is very bad in inequality of redistribution and public‬‭spending on old age is‬‭80% for‬ ‭pensions. To reach‬ ‭the efficiency frontier, France strategy advises reducing spending and not increasing the‬ ‭performance indicator (because for the same level of spending, the latter is much too high).‬ -‭ ‬‭Health expenses‬‭(8% GDP): performance indicator takes‬‭into account: access to new‬ ‭medications / access to care / results / prevention.‬ ‭Here again, France's strategy advises reducing spending to reach the border.‬ ‭ )‬‭Monetary policy and its constraints:‬ 2 ‭1-‬ ‭Principles and effectiveness of monetary policy:‬ ‭Monetary Policy‬‭=action by which the BC acts on the money O and/or the Ti.‬ ‭ )‬‭The main objectives and instruments of monetary policy:‬ a ‭Objective‬‭(since the 30G) = macro regulation of eco‬‭activity to reach the square of‬‭Kaldor‬‭.‬ ‭In reality, since the 70's (stagflation) BC has generally favored the objective of price stability‬ ‭(e.g.:‬‭Volker‬‭to the FED - see below), because KALDOR's‬‭obj is impossible all together, and price‬ ‭stability is necessary for the proper functioning of the other obj.‬ I‭n addition to this, the BC must ensure that it maintains the AP of the currency (Cf. Currency – role‬ ‭of the BC).‬ I‭nstruments:‬‭Until the 70's: direct and regulatory‬‭intervention by monetary‬ ‭authorities. 1)‬‭Credit supervision‬‭:any excess - financial‬‭penalty. Advantage:‬ ‭limit the credit without increasing the Ti (therefore without increasing the‬ ‭charges of the E). Only drawback: hinders competition rules.‬ ‭Ex: France used this instrument to control monetary creation between 1972 and 1987 in a period‬ ‭of high inflation.‬ ‭2)‬ ‭Refinancing‬‭(bank obtains liquidity from another bank‬‭or from the BC): when banks needed‬ ‭liquidity -‬ ‭They approached the BC which bought securities from CT against a Ti called discount rate. =>‬ ‭You played the role of the key rate.‬ ‭3)‬ ‭Mandatory reserves‬‭(multiplier etc.) used by monetary‬‭authorities to increase banks'‬ ‭need for central money - limit illiquidity risks and slow down monetary creation.‬ ‭ volution of the institutional context has changed the conditions for exercising monetary‬ E ‭policy:‬ ‭Since the 70's/80's: dvlp liberalized finance. Interventions monetary authorities + indirect, rely‬ ‭more on market mechanisms.‬ ‭Preferred instrument =‬‭open market‬‭-banks exchange surpluses‬‭and needs in central money. These‬ ‭operations lead BC to intervene in the money market by buying or selling securities to CT. If BC‬ ‭wants to relax monetary policy - D securities, therefore supplies money market with liquidity -‬ ‭causes drop Ti - drop in refinancing costs for banks which favor credit. And vice versa.‬ ‭To supply the market with liquidity, BC uses calls for tender: it provides liquidity to commercial banks‬ ‭in exchange for private or public securities that it takes under repurchase agreements.‬ ‭These instruments have appeared insufficient since the subprime crisis, because Ti is close to‬ ‭0% and threatens deflation. BC have launched unconventional‬‭action of‬‭3 types:‬ ‭-‬‭Quantitative easing (QE)‬‭): purchases large quantities‬‭of debt securities against liquidity provided‬ ‭to commercial banks - increased monetary base. Objective = facilitate the granting of credit.‬ ‭ ut it only has an impact on money supply if commercial banks distribute‬ B ‭more credits. We only use QE if we get closer to the deflation (see macro‬ ‭imbalances sheet).‬ ‭-‬‭Credit Easing‬‭(QQE): QE + Quantitative easing. Qualitative‬‭= BC modifies its balance sheet by‬ ‭agreeing to repurchase more risky securities.‬ ‭We only use the QQE in periods of deflation (see macro imbalances sheet)‬ ‭ )‬ b ‭Discretionary policy versus rule‬ ‭policy‬‭Rule or discretion: the different‬ ‭options:‬ ‭Obj BC = price stability. But what course of action? Discretionary, i.e. steering monetary policy‬ ‭according to circumstances, without predefined rules? Or rules, i.e. strict and defined in advance.‬ ‭Discretionary is not predictable. The Rules are predictable.‬ ‭ olicy rule can be passive (strict) or active (takes circumstances into account):‬ P ‭-‬‭Mr. Friedman‬‭:-Passive rule. Monetary policy must‬‭be based on an intangible rule, whatever‬ ‭the context. BC must be independent of the State. Objective salt = price stability.‬ ‭-Rule of‬‭J.B. Taylor‬‭:active rule - proposes a model‬‭which should help guide BC in the‬ ‭implementation of its policy. This rule makes it possible to establish an optimal Ti at CT taking into‬ ‭ ccount inflation and GDP:‬ a ‭r = r* + p + a(pp*) + b(yy*)‬ ‭r = Ti on CT; p = current inflation; p*= inflation target; y= effective GDP; y*=Potential GDP; r*=‬ ‭Neutral Ti - Theoretical Ti, which would have no effect on an economy which displays the‬ ‭ ED's objectives (full employment and inflation at 2% = balance).‬ F ‭a and b are coefficients (a + b=1). a is on CT (because infla is at the moment) and b is on LT (if‬ ‭Y>Y*, there will be‬ ‭inflation but not right away).‬ -‭ We measure the Ti when inflat° exceeds the target, or when the - eco exceeds the - potential‬ ‭(because at LT risk of overheating ie O