Keynes and the Contemporary Economic Crisis

MIHIR RAKSHIT

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It were not best that we should all think alike; it is difference of opinion that makes horse races. Mark Twain [W]orldly wisdom teaches us that it is better for reputation to fail conventionally than to succeed unconventionally. Keynes

Since the recession bottomed out and world economies started recovering from late 2009, the dominant perception concerning the problems facing the afflicted nations and policies required for resolving them has shifted dramatically away from the Keynesian perspective.

I. Introduction
The outbreak of the global economic and financial crisis in 2008 saw a resurrection of the Keynesian economics after its decline and near-total eclipse for nearly four decades. However, the resurrection turned out to be quite transitory. Since the recession bottomed out and world economies started recovering from late 2009,1 the dominant perception concerning the problems facing the afflicted nations and policies required for resolving them has shifted dramatically away from the Keynesian perspective. In this context it appears worthwhile to (a) examine how far Keyness ideas are useful for an understanding of the interplay of factors behind the current crisis; and (b) assess, in the light of (a), the efficacy of alternative policy programmes for its resolution. Since the majority of present-day economists and policy makers do not seem to have an adequate appreciation of Keyness views on macroeconomic theory and policy, as set forth in the General Theory2 (Keynes, 1936), for ready reference and as a prelude to our discussion in subsequent sections, we summarise some basic tenets of the Keynesian economics that are of especial relevance for contemporary economic events. The distinguishing feature of the Keynesian economics is its
Thanks to Keynesian policies, as we shall presently discuss. Henceforth all references from Keynes, unless stated otherwise, will be from the General Theory.
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When investments are debt-financed both the borrowers perception of risk concerning the prospective yield and the state of credit or the confidence of lending institutions towards those who seek to borrow from them are of overwhelming importance for the behaviour of the macroeconomy.

refrain that the full employment equilibrium is an exception rather than the rule in a capitalist economy and that left to itself the economy is prone to wide fluctuations. This sets the Keynesian theory apart not only from the (pre-Keynesian) neoclassical theory, but also from the currently ruling macroeconomic paradigm under which even without any policy intervention output and employment tend to hover close to their full-employment (or natural) levels.3 Second, economic fluctuations are due primarily to volatility of demand for durable capital goods. In fact, a central theme of the General Theory relates to the extreme precariousness of the basis of knowledge on which our estimates of prospective yield [on long-lasting assets] have to be made (Keynes, p. 149). When such assets are made liquid and easily marketable, even a hard-headed investor is guided by near-term prospects of capital gains and losses. In well-organised capital markets these prospects in their turn are driven by speculators endeavour4 at foreseeing changes in the conventional basis of valuation a short time ahead of the general public (p. 154). Third, when investments are debt-financedas they mostly are in developed market economiesboth the borrowers perception of risk concerning the prospective yield and the state of credit or the confidence of lending institutions towards those who seek to borrow from them (p. 158) are of overwhelming importance for the behaviour of the macroeconomy. During the boom, it is also emphasised, the popular estimation of both these risks, both borrowers risk and lenders risk, is apt to become imprudently low (p. 145). The converse is true in times of depression. Fourth, similarity of opinion regarding the future can be a major source of instability and ineffectiveness of monetary policy in controlling the activity of the economic system5: . . . opinion about the future of the rate of interest may be so unanimous that a small change in present rates may cause a mass movement into cash

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3 In the very first paragraph of the General Theory, Keynes, while explaining the emphasis on the prefix general, suggests: the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience (Keynes, p 3). So far as the temporal behaviour of the economy is concerned, Keyness conclusion is: In conditions of laissez-faire the avoidance of wide fluctuations in employment may, therefore, prove impossible without a far-reaching change in the psychology of investment markets such as there is no reason to expect (Keynes, p 320). 4 Keynes uses the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life (p 158). 5 Thus this method of control, Keynes observes, is more precarious in the United States, where everyone tends to hold the same opinion at the same time, than in England where differences of opinion are more usual (p 172).

(p. 172). As we shall presently note, unanimity of opinion regarding other prospective events could also be seriously destabilising. Fifth, given the failure of the market mechanism in coordinating decisions of different groups of economic agents and ensuring full employment of resources, macroeconomic outcomes are often paradoxical and many a neoclassical conclusion, both analytical and prescriptive, involves a serious fallacy of composition. Some of the important examples in this regard cited in the General Theory are the paradox of thrift, the output-enhancing effect of unproductive public works like digging holes and filling them up, and the folly of relying on money wage cuts as a means of reducing unemployment. In this connection Keynes (Ch. 19) also discusses at length why for boosting aggregate demand monetary policy is much superior to money wage cuts.6 Apart from the fact that the former is easier to implement,7 the latter is liable to induce a deflation expectation, raise the burden of debt, and hence could be seriously counterproductive. Even monetary policy will however be of little avail when the economic downturn is characterised by high uncertainty and abnormally low private propensity to spend and flight to liquidity (pp. 2078). Under these conditions expansionary fiscal measures are imperative for revival of the economy. Keeping the above and other related elements of the Keynesian economics in view we examine in the rest of the paper the operation of various factors including policy interventions during the different phases of the current crisis. Section II is devoted to tracing the roots of the crisis. This is followed in the next section by an analysis of the recessionary phase over 2008-9. An important (and apparently nonKeynesian) feature of the downturn was that, though the 2008 financial upheaval was of seismic proportions, the ensuing recession was relatively shallow and short, with the global economy experiencing recovery from late 2009. Section III seeks to unearth the main reasons behind this fairly quick reversal of contractionary tendencies. The next section discusses why the revival was followed by a sharp slowdown and intensification of the crisis and focuses on some basic weaknesses of policy programmes being implemented for its resolution. The final section concludes. Since the United States constituted the epicentre of the crisis, our analysis in the next three sections draws heavily on the behaviour of the US macroeconomy. However, given the close inter-country financial and economic interlinkages and spiralling debt crisis in the euro area, we also take into account how factors operating in other

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Keynes also discusses at length why for boosting aggregate demand monetary policy is much superior to money wage cuts. Apart from the fact that the former is easier to implement, the latter is liable to induce a deflation expectation, raise the burden of debt, and hence could be seriously counterproductive.

Especially in a relatively closed economy. As Keynes notes, it is next to impossible to effect a proportionate reduction in all money wages: given the structure of the labour market, a downward adjustment in money wages will inevitably imply changes in relative wages even when the demand deficiency is general, not sector-specific.
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major countries interacted with those in the US in intensifying or mitigating the crisis during its different phases.

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II. Genesis of the Crisis

The genesis of the crisis does not, on the face of it, corroborate the Keynesian thesis (Ch. 22). According to Keynes, it is the investmentcum-stock market booms and busts, driven by speculation rather than long-term fundamentals, that constitute the core of business cycles.8 Again, Keynes considers residential investments despite their durability and high risk to be less volatile.9 However, unlike in the case of the Great Depression and contrary to Keyness observations concerning the characteristics of investment in housing, it was the home price bubble coupled with financial excesses in the mortgage market that lay at the roots of the current crisis (Rakshit, 2008, 2009). Though the genesis of the crisis was in the housing sector rather than in other fixed investments, its behaviour closely corresponded to the time profile of investment-cum-share market booms and busts, as described in the General Theory. Note first that the real price of a house10 should ideally depend on the prospective series of real rent during its lifetime (and the long-term interest). However, as Shiller (2007) notes, between Q4 96 and Q1 06 real house prices rose by an unprecedented 86 per cent, but real rent remained practically unchanged, crawling up by only 4 per cent during the entire period. What is much more revealing, between Q1 02 and Q1 06, when bullishness in the housing market was at its strongest, not only was there a sharp slowdown in the growth rate of real rent, but the level of rent itself fell precipitously from Q2 04 onward (Table A.1). There can thus be little doubt that as in the run-up to the 1929 crash, home prices during Q4 96Q1 06 were driven by near-term expectation of their northward movement, not prospective yields during the lifetime of residential buildings.11 Again, since the effect of home prices on

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Though the genesis of the crisis was in the housing sector rather than in other fixed investments, its behaviour closely corresponded to the time profile of investment-cumshare market booms and busts, as described in the General Theory.

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As already noted in the previous section, a refrain of the General Theory is the overwhelming role of share prices in driving private investment and their extremely tenuous link with long-term fundamentals: It is of the nature of organised investment markets, under the influence of purchasers largely ignorant of what they are buying and of speculators who are more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of the future yield of capital-assets, that, when disillusion falls upon an over-optimistic and overbought market, it should fall with sudden and even catastrophic force (pp 315-6). 9 The reason advanced by Keynes is that the risk can be frequently transferred from the investor to the occupier, or at least shared between them, by means of long-term contracts, the risk being outweighted in the mind of the occupier by the advantages of continuity and security of tenure(p 163). The risk would also be significantly less for investors keen to live in their own houses. 10 i.e., the value of a house in terms of its command over the quantum of consumer goods and services. 11 The magnitude of the home price bubble is indicated by Feldsteins estimate that by 2006 the national real home price index reached a level 70 per cent above the equivalent real rent (Feldstein, 2007).

residential investment is similar to but more significant than that of share prices on investment in machinery and equipment12 (as postulated in the General Theory), for nearly a decade before the mid 2006, house building became, to borrow from Keynes, a by-product of the activities of a casino (p. 159). Second, the mechanism through which the housing boom culminated in a crash closely corresponded to Keyness analysis of the share market boom and bust: . . . it is an essential characteristic of the boom that investments which will in fact yield, say, 2 per cent in conditions of a full employment are made in the expectation of a yield of, say 6 per cent, and are valued accordingly. When the disillusion comes this expectation is replaced by a contrary error of pessimism (pp. 3212). More to the point, large accumulation of capital induced by a stock market bubble, Keynes observes in the context of the Great Depression, cannot but end in such a disillusion: New investment during the previous five years had been on so enormous a scale that the prospective yield on further additions was, coolly considered, falling rapidly. Correct foresight would have brought down the marginal efficiency of capital to an unprecedentedly low figure; so that the boom could not have continued on a sound basis (p. 323). The relentless fall in residential investment from 2006 onward was also preceded by a prolonged and exceptionally high residential investment that tended to depress real rent and made the bust inevitable. Over 200105 not only did the (y-o-y) increase in growth of residential investment show a sharply rising trend, but the growth was also significantly higher than that of GDP and total capital accumulation. The result was that between 2000 and 2005 the ratio of residential investment to GDP and aggregate investment went up from 4.5 and 21.6 per cent to 6.1 and 30.2 per cent respectively. Remembering that real rent depends on supply of housing in relation to incomes originating in other sectors of the economy (Rakshit, 2008), the disproportionately large increase in house building compared with that in additions to other capital goods would inevitably depress the prospective return on residential investments even under full employment. The problem got exacerbated when the economic slowdown triggered by the fall in home prices in 2006 sent the prospective yield in the negative region and set the stage for a housing-cum-economic meltdown, similar to the concerted decline in share prices, output and employment following the 1929 stock market crash.

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The mechanism through which the housing boom culminated in a crash closely corresponded to Keyness analysis of the share market boom and bust.

12 Over the entire period, Q 97Q 11, private non-residential and 1 4 residential investment were strongly correlated with share prices and home prices respectively; but while the correlation between growth rates of non-residential investment and growth rates of the S&P 500 index was 0.70, that between temporal changes in residential investment and the house price inflation amounted to 0.86.

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Since the early 1980s, legal, institutional and technological changes and financial innovations induced thereby made both mortgage loans and residential investments highly liquid.

Some Economics of House Price Bubble The natural question to ask at this stage is, why, contrary to Keyness characterisation of residential investment, the behaviour of the housing market from the late 1990s displayed all the hallmarks of the pre-1929 stock market. The answer, interestingly enough, is also Keynesian. Speculation (rather than enterprise) tends to become, according to Keynes, the predominant driver of those classes of investment which are readily marketable or highly liquid13something which investment in housing was not in Keyness days: the extreme illiquidity of mortgage loans with a duration of about 30 years, financial regulations and high transactions (including search) costs in the housing market militated against large scale debt-financing of speculative investment in residential buildings. By the 1990s however conditions in the housing and mortgage markets had changed radically. As we have documented elsewhere (Rakshit, 2008), since the early 1980s, legal, institutional and technological changes and financial innovations induced thereby made both mortgage loans and residential investments highly liquid. Deregulation of deposit rates,14 removal of ceilings on mortgage rates, abolition of the geographical boundary within which an individual mortgage lending agency had to operate,15 liberalization of the types of mortgages that could be offered, sharp reductions (thanks to the computer-cum-information technology revolution) in the cost of handling enormous data for purposes of framing mortgages appropriate to the individual borrowers credit-risk characteristics and developing easily computable risk management modelsall these led to gamechanging financial innovations that not only boosted the flow of mortgage loans, but also made them highly marketable through their transformation into collateralised debt obligations (CDOs) and other structured securities.16 No less important was the enormous increase in liquidity of houses themselves: apart from the fall in search costs to the near-zero
13 Keynes is categorical that his thesis regarding speculation (rather than the genuine expectation of the professional entrepreneur) does not apply, of course, to classes of enterprise which are not readily marketable or to which no negotiable instrument closely corresponds. Then he goes on to add, The categories falling within this exceptions were formerly extensive. But measured as a proportion of the total value of new investments they are rapidly declining in importance (p. 151, fn 2). 14 Under the Depository Institutions Deregulatory and Monetary Control Act, 1980. 15 Generally within a radius of 50 miles. 16 It is interesting to note that around 90 per cent of a pool of subprime mortgages, when bundled and tranched into CDOs, often earned an A or higher credit rating and found ready takers in the market even though each underlying loan was illiquid and highly risky. The system of grading of mortgage-based securities (MBSs) enlarged the scope for highly leveraged investments in them through the issue of asset-backed commercial papers (ABCPs) or other short-term credit instruments, and hence helped in deepening the market for MBSs and making them still more liquid (to an individual investor).

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level that the communication-cum-information-technology had effected, house owners could also avail of easy credit facility against their home equity, the excess of the market value of a house over the amount of mortgage loan outstanding. No wonder, with ever easier terms of mortgage credit including an exceptionally high loan-to-value ratio, residential investment came to be dominated by near-term expectations, and the housing bubble during 19972006 assumed such unprecedented proportions. In view of the predominance of short-term expectations and debt financing in the markets for housing and structured securities, the interaction of factors magnifying the boom and bust was similar to that delineated in the General Theory (Ch. 22). The most important of these factors are: (a) the relation between speculation-driven asset prices and investment; (b) impact of debt-financed asset purchases on households consumption propensities;17 and (c) large shifts in liquidity preference in response to changes in expectations. We have already noted how the boom and bust of residential investment between 1997 and 2008 were closely related to surging house prices and their rapid decline. No less significant was the way personal consumption was driven by house price movements during this period. As galloping home prices boosted households net worth, there was a sharp rise in their consumption, very often financed through borrowing against home equity. Between early 1998 and late 2005, when the real Case-Shiller (CS) index registered an increase of nearly 120 per cent, personal consumption as a ratio of personal disposable income displayed a pronounced upward trend, posting a rise of around 4.5 percentage points (pps); however between Q4 05 and Q4 08, as home prices were moving southward, the trend was in the opposite direction and the decline in the ratio amounted to as much as 4.8 pps (Table A.1). Consider further the torrential flow of funds into the mortgage and MBS markets between 1997 and 2006 and the flight to liquidity following the outbreak of the subprime crisis and demise of Lehman Brothers,18 and it is not difficult to appreciate how illuminating the General Theory analysis is in identifying the source of the crisis and the mechanism through which it got magnified. Again, it was the utter oversight of basic Keynesian lessons on the part of both regulatory authorities and agencies engaged in financial innovations that led to their failure to appreciate how the innovations were making the macroeconomic and financial system highly fragile. Before proceeding to the next phase of the crisis it thus

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In view of the predominance of short-term expectations and debt financing in the markets for housing and structured securities, the interaction of factors magnifying the boom and bust was similar to that delineated in the General Theory.

17 Speculators having easy access to credit are, Keynes notes, even more influenced in their readiness to spend by rises and falls in the value of their investments than by the state of their income (p 319). 18 Despite the fact that as soon as the crisis broke out the Federal Reserve and all other central banks, unlike in the early 1930s, started making huge injections of liquidity in a bid to revive inter-bank and other types of credit.

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seems worthwhile to highlight the fatal flaws in the financial engineering and comment on some fairly common misconceptions concerning the nature of policy failure in preventing the crisis. Financial Engineering and the Crisis: Some Keynesian Perspectives The financial engineering, especially the large scale transformation of high-risk, illiquid mortgage (and other) loans into highly rated and easily marketable financial instruments, was designed to reduce the risk of extending credit for acquiring assets returns on which are uncertain and stretch over a period of 40-50 years. The transformation was aided by highly sophisticated models of risk assessment and grading of different categories of securities, vanilla as well as synthetic. No less high-power were the risk assessment-cummanagement models deployed by banks and other financial institutions investing in these instruments. Paradoxically however, the instruments designed to reduce risk and strengthen the shock-absorptive capacity of financial firms made them highly vulnerable and a major crisis waiting to happen.19 Resolution of the paradox is fairly straightforward once we take cognizance of some of the Keynesian lessons, summarised in the introductory section. The most important of these is the difference between the outcomes of individual and collective actions. Keynes highlights in this connection the fetish of liquidity on the part of investment institutions,20 oblivious of the fact that there is no such thing as liquidity of investment for the community as a whole (p. 155, italics added). The relevance of this in the context of the current crisis can hardly be overemphasised. Thus synthetic securities churned out of highly illiquid long-term mortgage loans were no doubt easily marketable (at prevailing prices) so that for an individual financial entity investment in them financed through short-term loans would not seem to entail significant risk. But if all investors try to sell off the securities when large scale default on mortgage loans looms large,

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Paradoxically, the instruments designed to reduce risk and strengthen the shockabsorptive capacity of financial firms made them highly vulnerable and a major crisis waiting to happen.

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19 Interestingly enough, during the bubble years households turned out to be much more rational than hard-headed bankers and credit rating agencies renowned for their number crunching abilities. Given the extremely high loan-tovalue ratio of mortgages, sharply rising house prices and exceptionally low teaser rates (for the initial two-three years), investment in housing was speculative (in the Keynesian sense), but far from irrational: a rise in house prices would effect a disproportionately large increase in house equity, which as already noted was highly liquid; and the loss on account of a steep fall in house prices would on the other hand be relatively small, considering (a) the rent (explicit or implicit) enjoyed before the foreclosure, and (b) the fact that when the home equity had turned negative, households could walk away from mortgage liabilities without incurring any loss on other assets. 20 Keynes focuses on the anti-social nature of the fetish in view of the fact that The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future (p. 155).

security prices would nosedive, supply of short-term loans dry up and the liquidity of MBSs prove illusory. More generally, models developed by banks for assessing and managing risk as also those deployed by credit rating agencies for grading MBSs were partial in nature and did not, contrary to Keyness teachings, take into account the interaction between the financial and real sectors of the economy or the macroeconomic consequences of large scale adoption of the financial innovations. To illustrate, the high credit ratings assigned to MBSs and their increasing share in financial firms portfolio were due primarily to the fact that (i) estimates of credit risks were based on data when default rates on all mortgage loans were coming down sharply; and (ii) the probability of default on the part of borrowers with different credit characteristics was taken to be largely independent. There was thus little cognizance of the fact that: (a) the decline in default rates was the inevitable outcome of the unabated house price inflation from 1997 onward and the exceptionally easy credit facilities against home equity; (b) the huge flow of funds into the mortgage market itself helped in sustaining the housing bubble, creating a feedback loop between home prices, default rates and mortgage loans; and (c) the rising investments in residential construction along with that in furniture, fittings, etc., through the multiplier and their positive impact on investment in other sectors, boosted aggregate output and employment and hence reduced default on all types of credit. No wonder, the models proved so ruinous for financial firms and the macroeconomy.21 An important reason why the financial engineering sans an appropriate macro-theoretic framework had such enormous consequences for the bubble and the bust was the near-identity of the models behind the engineering. As noted in Section I, Keynes identifies similarity of opinion concerning the future as an important factor causing instability in the system, magnifying the amplitude of fluctuations and robbing anti-cyclical monetary measures of much of their cutting edge. With banks and financial firms using basically the same models/manuals for deciding on investments, their sources of finance and risk management, the agents behaviour became practically identical. The result was a scramble for MBSs when the housing market

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The huge flow of funds into the mortgage market itself helped in sustaining the housing bubble, creating a feedback loop between home prices, default rates and mortgage loans.

21 The serious limitations of these models and the near-total absence of any Keynesian perspective in their assessment in most quarters are attested by the results of the stress tests undertaken by many financial firms in early 2007 and by the IMF reading (IMF, 2007) of the ongoing troubles in the mortgage market: this weakness has been confined to certain portions of the subprime market (and, to a lesser extent, the Alt-A market), and is not likely to pose a serious systemic threat. Stress tests conducted by investment banks show that even under scenarios of nationwide house price declines that are historically unprecedented, most investors with exposure to subprime mortgages through securitized structures will not face losses.

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was having a bull run and a stampede to exit no sooner had the home price inflation turned negative.22 Policy Failure in Preventing the Boom and Bust Our examination of the roots of the crisis suggests the nature of policy failures during the bubble years. Two types of failure are generally cited in this connection. The first is regularity, the second relates to the extraordinarily low policy rates maintained by the Federal Reserve.23 There was little appreciation among policy makers of the serious limitations of the Basel prudential norms concerning capital adequacy, etc. and of the nature and magnitude of the systemic risks being built up during the bubble years. Nor was the regulatory frameworkwith separate authorities overseeing banks and other financial firmsappropriate for tackling the growing financial fragility. These inadequacies were due almost entirely to the disregard of the Keynesian principles in framing the norms and regulatory framework. It was only after the crisis had broken out did the policy makers come to appreciate the urgent need for formulating macroprudential norms for financial firms and ensuring close coordination among various regulatory and supervisory authorities. Elsewhere (Rakshit, 2008) we have discussed in some detail why the Feds interest rate policy cannot be held responsible for the bubble and the bust. Here also the reasons are Keynesian. The precrisis period, as already noted, was not marked by an overheated economy or high inflation (Table A.1). Residential investment and home prices were no doubt booming; but this reflected what Keynes calls (p. 323) misdirected investment and did not call for monetary tightening. A high enough interest rate for cooling the overheated housing market would not only have precipitated a recession,24 but also caused a much sharper fall in non-residential than residential investment. Hence, as per the Keynesian analysis (Ch. 22), the duration of the downturn would then have been longer and the recovery significantly slower.25 Instead of monetary tightening, whose impact is

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It was only after the crisis had broken out did the policy makers come to appreciate the urgent need for formulating macroprudential norms for financial firms and ensuring close coordination among various regulatory and supervisory authorities.

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22 Apart from the instability induced by the similarity of opinion (resulting in what is nowadays called herd behaviour), it is also fairly obvious (as the Keynesian analysis implies) that it is the diversity of opinion regarding the future price of a security that permits its easy sale (without any loss of value) on the part of individual investors. Recall Keyness observation that there is no asset (other than fiat money) that is liquid for all holders taken together. 23 We ignore here the failure to address the build-up of external imbalances since the crisis-promoting role of global imbalances is far from clear; not only was there no disorderly exit from the US capital market, there was in fact a massive flow of funds to the market in the aftermath of the crash. Again, such imbalances can be addressed only through policy coordination at the international level. 24 Recall that the main driver of growth during the period was investment in housing. 25 To see why, note that at full employment the (real) return on housing is positively related to the income originating in the non-housing sector: the smaller the

necessarily economy-wide rather than sector specific, containment of the housing bubble and the associated misdirected investment required an effective regulatory framework for mitigating the serious systemic risk and financial fragility engendered by the building boom.

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III. The Recessionary Phase: Some Non-Keynesian and Keynesian Characteristics

According to the General Theory (Ch. 22), following the burst of the bubble the downturn in output and employment tends to be steep and cumulative, but the economic recovery sluggish, hesitant and long-drawn. The explanation runs in terms of (a) the dynamics of investment, both durable and inventory; (b) consequences of asset-price collapse on private spending propensities in a debt-ridden economy; (c) changes in liquidity preference or the state of credit along with that in the marginal efficiency of capital; and (d) operation of the multiplier. However, the behaviour of the economy after the bursting of the housing bubble has not always been in conformity with the Keynesian thesis. Though the US GDP had been decelerating from Q3 06, the first fall in the level of output (amounting to 0.6 per cent) occurred only in Q3 08. Thereafter the decline was significantly steeper until it slowed to 0.1 per cent in Q4 09 since when GDP has been moving northward. Unemployment remained at a fairly low level (around 4.5 per cent) during the initial phase of the deceleration (Q3 06Q2 07), started rising at a sluggish pace from mid-2007 to Q2 08, leaped by 70 basis points (to 6.0 per cent) in Q3 08, and rose sharply over the next five quarters, peaking at 9.9 per cent in Q4 09. From Q1 10 onward the rising level of the output has been accompanied with a downward drift in joblessness. The Housing Debacle and the Upper Turning Point We have traced the roots of the crisis to speculative excesses in the housing and mortgage markets; but as noted above, there was a lag of more than a year between bursting of the housing boom and crisis in the mortgage market (initially called the subprime crisis26) in mid-2007 and onset of the recession from Q3 08. This seems to run counter to the General Theory characterisation of the upper turning point of a typical

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There was a lag of more than a year between bursting of the housing boom and crisis in the mortgage market in mid-2007 and onset of the recession from Q3 08. This seems to run counter to the General Theory characterisation of the upper turning point of a typical

ratio of non-housing capital to the stock of houses, the lower will be the rent. Again, when the (sectoral) overinvestment in housing drives down its return (with full employment of resources) below the long-term interest rate, residential investment dries up, causing demand deficiency and reducing further the prospective yields on residential along with that on non-residential investment (Rakshit, 2008). Hence with a higher (initial) ratio it would take longer before depreciation of the stock of housing and revival of non-residential capital accumulation make residential investment profitable and push up the pace of recovery. 26 As we have explained elsewhere (Rakshit, 2008), this was a misnomer since the roots of the trouble lay in the entire mortgage market, not in its subprime section alone.

trade cycle.

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Given the fact that the shares of nonresidential fixed investments in aggregate capital formation and GDP were substantially larger than that of residential investment, it is easy to appreciate why the downturn in output did not occur immediately after the collapse of construction activities.

trade cycle. However, the lag is not difficult to explain in terms of the Keynesian analytical framework once we take into account some structural features of the US and the world economy in the late 2000s. As already noted, the prolonged housing boom was not accompanied with any significant rise in other categories of investment. Not only did private non-residential fixed investment decline over Q2 01Q1 03 following the bursting of the dotcom bubble, but even after such investments had started recovering (from Q3 03), until 2004 their growth was relatively modest and remained lower than that of investment in housing. However, by Q2 06, when residential capital formation started declining, non-residential investment had become buoyant and remained fairly robust until the financial (including the stock market) meltdown sent it tumbling from Q3 08 onward. Given the fact that the shares of non-residential fixed investments in aggregate capital formation and GDP were substantially larger than that of residential investment,27 it is easy to appreciate why the downturn in output did not occur immediately after the collapse of construction activities. The aforesaid disjunction in the phasing of the two types of fixed investment was closely related (as per the General Theory analysis) to the asymmetric behaviour of the home price and the stock price indices during the period. It was the sharp deceleration of house prices in the first half of 2006 followed by their decline thereafter, that marked the end of the housing boom and beginning of a prolonged slump in residential investment. But despite the weakening and collapse of the housing market, stock prices exhibited an upward trend throughout Q1 06Q4 07. Only with the large scale failure and nearbankruptcy of financial firms in 2008 did share prices and nonresidential fixed investment come crashing. (Table A.1). But why was there a stock market surge during Q1 06-Q4 07 when home prices were weakening? One reason was the widespread perceptionamong not only investors in the share market, but also economists and think-tanks including the IMFthat the problem being confined to the subprime section of the mortgage market was quite unlikely to pose a serious systemic threat (IMF, 2007), especially since systemically important financial institutions began this episode with more than adequate capital to absorb the likely level of credit losses (IMF, 2007a). The perception was also due in no small measure to the reputation the central bank had acquired concerning its ability to keep the economy on an even keel. Of particular significance in this context was the memory of the effectiveness of Feds monetary measures in the wake of the dotcom bust: thanks to the sharp cuts in the federal
27 Thus in Q 06 (since when residential investments turned negative) the 1 shares of private fixed non-residential investment in gross private investment and GDP were 53.1 and 11.1 per cent respectively; the corresponding figures for residential investment were 29.6 and 6.2 per cent respectively.

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fund rate (ffr) from 6 to 1 per cent between 31 January, 2001 and 25 June, 2003, GDP growth, after decelerating (but remaining positive throughout) over Q1 01Q4 01, started recovering from early 2002 and turned exceptionally healthy from Q3 03 onward.28 No wonder then that the Feds (and other major central banks) aggressive cuts in policy rates and injection of huge liquidity as soon as the subprime problems had surfaced went a long way in sustaining investors confidence in the resilience of the macroeconomy. Finally, the contractionary impact of the slump in residential investment was more or less neutralised by the surge in external demand originating in high growth of the world economy in general and emerging market economies (EMEs) and oil-exporting countries in particular. In 2006 and 2007 the (y-o-y) decline in residential investment amounted to 7.2 and 18.7 per cent respectively; exports on the other hand grew at the rate of 9.0 and 9.3 respectively in the two years. Given the much larger share of exports in GDP compared with that of residential investment, the standalone contributions of the former and the latter to GDP growth29 were 0.94 and 0.45 per cent respectively in 2006, and 1.02 and 1.07 per cent respectively in 2007. Only with the onset of the severe, global financial turmoil and downturn of the world economy did export growth decelerate from 11.3 per cent in Q2 08 to 6.4 per cent in Q3 08 and turn negative since then, reinforcing the recessionary impact of the slump in construction and drying up of other sources of domestic demand. Contractionary Mechanism The onset of the financial upheaval in late Q3 08 was followed by a rapid decline in output over the next three quarters, with GDP falling progressively by 3.3, 4.2 and 4.6 per cent respectively. Even in Q3 09 the decline in GDP (at 3.3 per cent) was still steep;30 but by end2009 recessionary forces had waned and output started rising from Q1 10 onward.31 Let us see how far the interplay of factors behind the steep fall in the level of economic activity following the upper turning point was in conformity with the Keynesian theory where the focus is on the collapse of the marginal efficiency of capital and large

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The Feds and other major central banks aggressive cuts in policy rates and injection of huge liquidity as soon as the subprime problems had surfaced went a long way in sustaining investors confidence in the resilience of the macroeconomy.

28 The recovery was also aided by the sharply rising trend of residential investment from Q1 02 and expansionary fiscal measures. It is worth noting that in this instance also there was a time lag (of about six quarters) between the resumption of the bull-run in residential investment and the beginning of the recovery in share prices and non-residential fixed investment (Table A.1). 29 The contribution of (say) exports is given by the growth rate of exports in the year times the ratio of exports to GDP in the previous year. 30 Remembering that in Q 08, the level of output was close to its pre-crisis 3 peak. 31 The behaviour of unemployment was in conformity with that of GDP during the recessionary phase, Q3 08Q4 09. Unemployment jumped from 5.3 per cent in Q2 08 to 6.0 per cent in the following quarter, rose rapidly to 9.3 per cent in Q2 09, peaked at 9.9 per cent in Q4 09, and started drifting downward since then.

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Though residential investment fell by nearly 25% during the most intense phase of recession what was crucial in effecting the rapid decline in the level of economic activity was the 16.5% fall in private nonresidential fixed investments.

disinvestment in stocks associated therewith and on the impact of the collapse on the propensity to consume and the liquidity preference. Note first that though residential investment32 fell by nearly 25 per cent during the most intense phase of recession (Q4 08Q3 09), what was crucial in effecting the rapid decline in the level of economic activity was the 16.5 per cent fall in private non-residential fixed investments (PNFIs). Apart from the fact that compared with the share of residential construction in GDP (averaging 3.4 per cent during Q1 08Q3 08) PNFIs share (at 11.7 per cent) was much larger, their decline severely dented investors confidence, intensified the bearishness in the housing market and set the stage, a la the General Theory thesis, for a huge disinvestment in stocks.33 The fall in residential investment and a slowdown in GDP growth had already caused a decline in inventory investments from Q4 06 and made them negative since Q4 07 as subprime troubles assumed alarming proportions; but there was a quantum change in the scenario following the onset of the financial turmoil: investment in stocks plunged by 205.5, 737.3, 1101.6, 1206.3 and 376.4 per cent in the five successive quarters from Q3 08 to Q3 09. The demand-dampening effect of such vertiginous falls is indicated by the fact that though the ratio of inventory investment to GDP was only minus 0.1 per cent in Q1 08, the 725.4 per cent (y-o-y) growth (in the algebraic value) of disinvestment34 in stocks in Q1 09 effected a 0.73 percentage point (pp) fall in GDP, compared with the fall of 0.95 and 1.05 pps caused by the decline in residential investment and PNFI respectively in that quarter. Be that as it may, the fact that out of the 3.85 per cent fall in GDP during Q4 08Q3 09 almost the entire amount is accounted for by the (standalone) demand-dampening effect of the 25.7 per cent fall in private capital formation confirms the General Theory thesis regarding its overwhelming role in effecting the downturn. Again, only when private investment had bottomed out and started recovering did output growth turn positive from early 2010 (Table A.1). The behaviour of household consumption was also in conformity with the Keynesian thesis.35 Following the downward drift in home prices and intensification of the subprime crisis the ratio of

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On top of its unabated and rapid fall since Q1 06. The aftermath of the collapse of fixed investment, Keynes notes, will lead to an accumulation of surplus stocks of unfinished goods, absorption of which represents negative investment (p 318). Again, the reduction of working capital, which is necessarily attendant on the decline in output on the downward phase, represents a further element of disinvestment, which may be large and since the recession has begun, this exerts a strong cumulative influence in the downward direction (p 318). 34 Since in Q 08 inventory investment was negative, the increase in its 1 absolute value in Q1 09 implies a (y-o-y) rise in the algebraic value of disinvestment. 35 Though the period Q 08Q 09 saw personal consumption registering a 4 3 fall of 2.48 per cent compared with a 3.85 per cent fall in GDP, it needs to be noted that disposable income fell at a slower rate than consumption.
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personal consumption to disposable income had already started falling, albeit slowly, from the last quarter of 2007. The collapse in share prices over Q3 08Q1 09 (with no let-up in the southward movement of the CS index) caused a sharp reduction in the ratio from 93.9 per cent in Q3 07 to 90.3 per cent in Q2 08. The GDP-debilitating effect of the downward shift of the consumption function was the most pronounced during Q4 08 and Q1 09 when the (y-o-y) decline in stock and home prices averaged about 40 and 19 per cent respectively. Though the fall in personal disposable income amounted to a modest 1.2 per cent in the six-month period, personal consumption expenditure went down by as much as 2.6 per cent. The significance of this in strengthening the recessionary forces may be appreciated from the fact that, with personal consumption constituting 70 per cent of GDP,36 output growth during Q4 08Q1 09 would have been higher by at least 1.0 pp37 had there been no asset price-induced fall in the consumption function. The most spectacular consequence of the fall in asset prices was the financial meltdown, with banks falling like nine pins, investors scrambling for liquidity, and credit flows drying up not only to enterprises and households, but in the interbank money market as well. However, though hogging the limelight, the flight to liquidity per se did not perhaps play a major role in accentuating the fall in fixed investment or (credit-driven) purchases of consumer durables: under darkening economic prospects, the demand-side factors (as Keynes never tires of emphasising) tend to be much more important than the willingness of lenders in governing the actual purchases.38 The major impact of the liquidity crunch was on investment in working capital. The cutback in short-term credit must have forced many enterprises to reduce their holding of stocks of raw materials and of finished and semi-finished goods below their optimal levels39: the astronomical figures for inventory disinvestment over Q4 08Q2 09 must have been due in part to producers inability to secure funds for meeting their working capital requirements. The resulting disinvestment in inventories and the multiplier operating thereon magnified the downward pressure on aggregate demand arising from the fall in fixed investment and the propensity to consume.

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Under darkening economic prospects, the demand-side factors (as Keynes never tires of emphasising) tend to be much more important than the willingness of lenders in governing the actual purchases.

In Q4 07Q1 08. i.e., would have been 2.8 instead of 3.8 per cent, assuming that in the absence of the fall in asset prices households would have reduced their consumption proportionately to the fall in disposable income. 38 Expectations that the credit crunch was unlikely to ease in the foreseeable future might have prompted some enterprises to abandon or postpone their plans to add to capacity; but its quantitative significance for the US economy was unlikely to have been large. However, the financial turmoil did have a significant impact on fixed investment in quite a few emerging economies, especially in East Europe, where foreign capital had been an important source of investment in the pre-crisis years. 39 i.e., what enterprises would have considered the most cost-effective in the absence of credit constraint.
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Though the mechanism driving down the level of economic activity was undoubtedly Keynesian, the recession itself was relatively short and shallow, and hence contrary to the General Theory delineation of a typical trade cycle.

Duration of the Phase Though the mechanism driving down the level of economic activity was undoubtedly Keynesian, the recession itself was relatively short and shallow, and hence contrary to the General Theory delineation of a typical trade cycle. The y-o-y decline in GDP lasted for six quarters, from Q3 08 to Q4 09, and averaged no more than 2.68 per cent. On the basis of the q-o-q output variations the recession period, Q3 08Q2 09, was significantly shorter though the average fall in GDP was larger at 5.0 per cent. The rise in unemployment, from 5.3 percent in Q2 08 to 9.3 per cent in Q2 09 and further to 9.9 per cent in Q4 09, was no doubt fairly steep, but nowhere near the peak (25 per cent) attained during the Great Depression. In view of the enormous losses suffered by financial institutions, the mad rush for liquidity and the mountainous debt (in relation to income) households had become saddled with, an explanation of the mildness and short duration of the downturn appears to be in order. The most important factors moderating and reversing the contractionary tendencies were (a) trans-border trade and (b) policy initiatives, and the consequences of both, we may note, are quite easy to appreciate in terms of Keyness theoretical framework. International Trade Thanks to the dismantling of the barriers to trade under the General Agreement on Tariffs and Trade (GATT) and World Trade Organisation (WTO), trades in goods and services had become much freer by the time the global crisis broke out in 2008. The trade-GDP ratio even in the USA, despite its large size and geo-climatic diversity,40 was as much as 31 per cent in the first half of 2008 and attested to the importance of exports and imports in governing aggregate demand in the economy. Though openness could be a double-edged sword as per the Keynesian macroeconomics, for the US economy the trans-border trade turned out to be highly salubrious during the recession. Over this phase, there was a significantly larger fall in US imports compared with that in exports. During Q3 08Q4 09 the (y-o-y) decline in exports, at 5.3 per cent, was half of the (10.46 per cent) plunge in the purchases of goods and services from the rest of the world. The importance of this significantly sharper fall in imports in moderating the macroeconomic downturn may be indicated with some rough and ready estimates. With the pre-crisis export- and import-GDP ratios averaging 13 and 18 per cent respectively, the standalone (positive) impact of the improvement in trade balance on the US GDP growth in Q3 08Q4 09 amounted to 1.2 pps41a huge boost when viewed against the 2.7 per cent fall in GDP registered during the period.
40 Trade as a proportion of GDP tends to be lower, the larger the size of the economy and the more diverse the countrys geo-climatic conditions. 41 As the ratio of trade deficit to GDP was reduced from 5.0 to 3.8 per cent.

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The improvement in trade balance was in its turn due to the operation of three structural factors. First, by 2007 services had become the overwhelming source of US GDP at the expense of industries so that the major part of the domestic demand for industrial products including capital goods and consumer durables (CGCDs) was being met through imports. Since the downturn was led by plummeting expenditures on CGCDs, their incidence was primarily on imports, not so much on demand for domestically produced goods and services.42 This was an important reason for the rapid international transmission of the crisis, but in the process the downward pressure on the US economy was lessened considerably.43 The second source of succour was the fall in petroleum prices. From their height at US$124.0 per barrel (pb) in Q2 08 international oil prices came down, successively to US$118.0, US$54.4 and US$43.0 pb over the next three quarters, and even while crawling upward thereafter remained relatively subdued for quite a while. The contra-cyclical behaviour of crude prices constituted a built-in macrostabiliser for large oil-importing countries: given the inelastic demand for petroleum products, a fall in oil prices provides a boost to domestic demand in these countries through (i) a decline in the leakage from the incomeexpenditure stream (by way of imports) and (ii) an increase in household consumption.44 So far as the USA was concerned, during Q4 07Q3 08 petroleum imports averaged about 17 per cent of total imports and around 3.0 per cent of GDP. The positive impact on US GDP of the 46 per cent (y-o-y) fall in international oil prices during the worst phase of the crisis, Q4 08Q3 09, thus amounted to as much as 1.4 pps45 and constituted an important factor in moderating the downturn. Finally, between 2001 and 2007 the share of major advanced (G7) countries in world output declined by nearly six pps to 42.7 per cent, but that of Emerging and Developing countries rose from 37.7 to 45.3 per cent (IMF, 2012). The trend was accentuated over the next two years with significantly poorer macro performance of advanced countries compared with that of the EMEs. While output in the G7 countries declined by 0.3 per cent in 2008 and 4.2 per cent in 2009, GDP in Emerging and Developing countries in the two years grew by

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The contra-cyclical behaviour of crude prices constituted a built-in macrostabiliser for large oil-importing countries: given the inelastic demand for petroleum products, a fall in oil prices provides a boost to domestic demand in these countries.

42 As noted elsewhere (Rakshit, 2010), following the outbreak of the crisis in Q3 08, during the next four quarters CGCDs and imports declined by 13.8 and 13.3 per cent respectively (compared with a 4.1 per cent fall in GDP). 43 Indeed, to the extent the US marginal propensity to consume was higher than that of its trading partners, there was also a moderation of global recession (Rakshit, 2010). 44 As households are left with a larger disposable income for expenditure on non-fuel products. 45 This is an overestimate to the extent it abstracts from the (priceinduced) increase in (the volume of) petroleum imports, but the estimate also ignores the additional household consumption due to fall in petroleum prices. Note also that since the US economy is large, the fall in crude prices cannot be regarded as wholly exogenous.

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6.0 and 2.8 per cent respectively. Significantly higher was growth in Developing Asia, at 7.7 per cent in 2008 and 7.2 per cent in 2009. Given their large weight and high trade-GDP ratio, rising incomes in developing countries helped considerably in preventing a repeat of the economic woes that had bedevilled the US and the world economy in the 1930s. Policy Initiatives It cannot be sufficiently emphasised that the relative mildness and short duration of the recession were due above all to the quick and concerted implementation of Keynesian policies practically everywhere. The main reason why the depression in the 1930s was so deep and prolonged was the attempt by major nations to devalue their way out of troubles sans any worthwhile measure to stimulate domestic consumption or investment. Drawing attention to the counterproductive consequences of such beggar-thy-neighbour policies, Keynes emphasises the urgent need for nations to learn to provide themselves with full employment by their domestic policy (p. 382).46 Fortunately this time not only was there no repeat of the economic chaos as in the 1930s because of widespread adoption of beggar-thy-neighbour policies,47 but the current crisis also saw prompt and vigorous implementation of a wide variety of measures by all major nations for boosting their domestic demandmeasures that were Keynesian in both their overall thrust and specific details. Unlike in the wake of the 1929 crash when the Federal Reserve and other central banks allowed money supply to nosedive and the financial system to disintegrate, at the very first sign of the liquiditycum-banking crisis in 2007 and 2008, central banks all over the world effected sharp cuts in policy rates, flooded the system with liquidity and mounted, aided by ministries of finance, rescue operations for tottering banks on an unprecedented scale.48 For making the monetary policy
46 With such a shift in the policy stance, International trade, Keynes goes on to conclude, would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, would merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage (pp 382-3). 47 Some nations did take recourse to protectionist measures this time as well (Rakshit, 2010), but their incidence was quite insignificant in relation to the volume of world trade. 48 The scale of intervention by monetary authorities for preventing collapse of the financial system is indicated by the fact that between July 2007 (when the subprime crisis surfaced) and mid-2009 the Federal Reserves liquidity injection-cum-support totalled US$1,155 billion, amounting to 8.1 per cent of the US GDP (IMF, 2009). The additional liquidity provided by all advanced country central banks during the period was a huge US$2,127 billion (7.6 per cent of GDP). The scale of injection by the EME central banks, at US$1703 billion, was less in absolute terms, but far larger (at 13.5 per cent) as a ratio of the countries GDP. By far the largest was the expenditure incurred by developed country governments in propping up weak and near-bankrupt financial institutions: as of August 2009 the

Fortunately, the current crisis saw prompt and vigorous implementation of a wide variety of measures by all major nations for boosting their domestic demand measures that were Keynesian in both their overall thrust and specific details.

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more effective, central banks also implemented a variety of unorthodox measures, first recommended in the General Theory. Drawing attention to the serious limitations of the practice of central banks to concentrate on short-term government bonds and to leave the price of long-term debts to be influenced by belated and imperfect reactions from the price of short-term debts. (p. 206), Keynes recommends that for anti-cyclical purposes the monetary authority should be prepared to deal both ways on specified terms in debts of all maturities and even more to deal in debts of varying degrees of risk (p. 205). This is in fact what the Federal Reserve and other major central banks did as soon as the crisis had broken out: apart from cutting the short-term policy rates to near-zero levels, not only did the central banks buy large quantities of long-term securities and permit banks to avail of medium-term funds, but the range of acceptable collateral was also widened to include relatively high risk-assets like MBSs .These measures along with large scale recapitalisation of banks helped in preventing a collapse of the financial system and laying the foundation for an early recovery. Last but by far the most important, in a major departure from the then prevailing orthodoxy, policy makers everywhere instead of relying on purely monetary measures took recourse to large scale fiscal expansion, as advocated in the General Theory.49 Following the outbreak of the financial crisis in September 2008, not only the US,50 but other developed country and EME governments also started implementing massive fiscal stimulus programmes51 for boosting aggregate demand.52

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Keynes recommends that for anti-cyclical purposes the monetary authority should be prepared to deal both ways on specified terms in debts of all maturities and even

cost on this count amounted to an astronomical US$9,490 billion, about 21.4 per cent of the countries GDP. 49 Even when the central bank is prepared to buy and sell debts of different maturities, Keynes is sceptical of its ability to counter a severe collapse of the marginal efficiency of capital. Part of the reason lies in the intermediation cost and high risk premium even if the pure rate of interest to the lender is nil (p 208). More crucially, during the downward phase, when both fixed capital and stocks of materials are for the time being redundant, the schedule of the marginal efficiency of capital may fall so low that it can scarcely be corrected, so as to secure a satisfactory rate of new investment, by any practicable reduction in the rate of interest (pp 319-20). 50 The USA took recourse to some fiscal expansion in early 2008 for countering the GDP-debilitating consequences of the subprime crisis. 51 The programmes consisted of public spending on infrastructure, education and health; transfers or income tax reliefs to households; provision of cash for purchases of new cars in exchange for old ones; tax rebates on a large number of (mostly durable) products; and assistance to recession-hit firms and to homeowners facing foreclosure of their mortgages. 52 While the US fiscal stimulus under the American Recovery and Reinvestment Act (ARRA) 2009 amounted to US$787 billion (5.5 per cent of the US GDP), the budgetary stimulus provided by the G20 advanced and developing countries totalled US$2,003.9 and US$673.2 billion respectively, and averaged a substantial 5.9 per cent of the groups GDP. The quantitative significance of the anti-recessionary role of the fiscal stimuli is perhaps better indicated by the deterioration in the groups fiscal balances by 5.9 pps between the pre-crisis year (2007) and 2009 (IMF, 2009).

more to deal in debts of varying degrees of risk. This is in fact what major central banks did as soon as the crisis had broken out.

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There can be little doubt that the budgetary stimuli constituted by far the most important factor behind the relatively shallow recession and early recovery, confirming the Keynesian thesis on the efficacy of fiscal policy vis--vis monetary management.

There can be little doubt that the budgetary stimuli constituted by far the most important factor behind the relatively shallow recession and early recovery, confirming the Keynesian thesis on the efficacy of fiscal policy vis--vis monetary management. Despite the huge financial sector support programmes implemented by the US and other advanced countries and the sharp cuts in policy rates by their central banks, there was little revival of credit flows over Q4 08Q3 09 and the decline in private investments continued to be vertiginous.53 This was especially so for the US economy where their (y-o-y) fall during the four quarters averaged a massive 26 per cent. Indeed, amidst the decline in all other components of aggregate demand, government consumptioncum-investment turned out to be the only source of expansion of the economy (Table A.1). While the rise in the governments direct purchases of goods and services during the period (at 2.1 per cent) helped in reducing the fall in GDP by 0.81.0 pp,54 tax reductions along with enhanced transfers and subsidies also seem to have played a no mean role in moderating and then reversing the downturn in household consumption and business investment.55 The efficacy of anti-recessionary measures, the Keynesian analysis suggests, is enhanced significantly by policy coordination among nations. Since some of the benefits of the expansionary policy of a nation accrue to others but its fiscal and current account balances tend to deteriorate, when countries operate in isolation, from the viewpoint of the world economy the scale of stimulus is liable to be suboptimal and the economic downturn steeper and more prolonged. Fortunately the crisis witnessed unprecedented cooperation among nations in coordinating their stimulus programmes as well as drawing up action plans at the supranational level. From mid November 2008 onward leaders and finance ministers of the G20 countries, which account for about 87 per cent of world output, started meeting56 at frequent intervals for drawing up time-bound action plans to restore global growth and lay the
53 This does not imply that financial stimulus measures were not necessary: their importance lay not so much in boosting demand in the short run, given the dismal state of investors and bankers expectations, but more in laying the foundation for a sustained recovery in the medium and long run. It may however be argued that the easy money policy moderated the fall in investment; but the hypothesis is not supported by the state of credit during this period. 54 Assuming that government consumption and investment constituted 4050 per cent of aggregate autonomous expenditure (i.e., expenditure not dependent on GDP). 55 Despite the households huge debt burden, thanks to massive transfers, the fall in personal consumption during Q4 08Q4 09 was significantly less than that in GDP. 56 Following the outbreak of the subprime crisis also there was extensive information sharing, consultation and collaboration among major central banks for arresting the financial meltdown and implementing measures to meet banks needs for domestic and foreign funds. This is apart from the orchestrated, deep cuts in policy rates effected in the aftermath of the crisis.

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foundation for reform to help to ensure that a global crisis, such as this one, does not happen again (G20, 2008). The short-term action plans drawn up in the first and second G20 summits (in Washington DC on November 15, 2008 and London on April 2, 2009 respectively) included close cooperation among the G20 national and regional authorities for promptly identifying and taking all possible steps to resolve domestic and cross-border financial crisis; collaboration between the IMF and the Financial Stability Forum (and its successor, the Financial Stability Board57 [FSB]) for framing macro-prudential framework and providing early warnings of macroeconomic and financial risks; substantial enhancement of resources of the international financial institutions (IFIs) for purposes of extending trade credit to the EMEs and helping them finance their counter-cyclical spending including bank recapitalisation, infrastructural investment and social support measures; and commitment to refrain from competitive devaluation and minimise the negative impact of a countrys fiscal, financial and other measures on its neighbours. The significance of the collaborative action plans in arresting and reversing the slide of the world economy can hardly be overemphasised. First, the expansionary impact of the stimulus measures implemented by different countries was magnified by the absence of competitive devaluation58 and attempts at minimising the adverse consequences of a nations policies on its neighbours. Second, arrangements for extension of trade credit and financial support to distressed EMEs for undertaking counter-cyclical policies provided a boost to their economies as well as their trading partners. Third, the policy coordination enabled the G20 countries to go in for expansionary programmes on a much bigger scale than would have been possible in the absence of such collaboration. Under the G20 action plans the additional injection of funds into the world economy by end-2010, consisting of the committed fiscal expansion to the tune of US$5.0 trillion and the US$1.1 trillion worth of (extra) finance routed through the IFIs, amounted to be an astronomical US$6.1 trillion, around 10 per cent of (the 2008) world income. Finally, the scale and seriousness of the coordinated rescue operation played an important part in restoring private agents confidence in near-term economic prospects. No wonder then that, by the time the G20 leaders met at Pittsburg (on September 2425, 2009), the worst phase of the crisis was over and the world economy appeared poised for a robust recovery.
57 The Financial Stability Forum (FSF) was founded in 1999 by the G7 finance ministers and central bank governors. As per the G20 resolution at the London summit on April 2, 2009, the FSB was established, with a strengthened mandate, as the successor to FSF. The main task of the FSB is to formulate and help in the implementation of effective regulatory, supervisory and other financial sector policies (G20, 2009). 58 Competitive devaluation, let us recall, was a major factor behind the rapid cross-country transmission and deepening of the crisis in the 1930s.

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Arrangements for extension of trade credit and financial support to distressed EMEs for undertaking countercyclical policies provided a boost to their economies as well as their trading partners.

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IV. Recovery and Slowdown

Thanks to the mutually reinforcing effects of coordinated stimulus programmes, 2010 saw all groups of countries staging a spectacular recovery. Between 2009 and 2010, while the world economic growth went up from 0.7 to 5.3 per cent, the corresponding increases in GDP growth of advanced and developing economies were from 3.7 to 3.2 per cent and from 2.8 to 7.5 per cent respectively. Particularly impressive was the recovery of the four largest, recessionhit advanced countries, the USA, Japan, Germany and the UK: in contrast to the fall in their GDP in 2009 by 3.0, 5.5, 5.1 and 3.9 per cent respectively, their output growth in 2010 amounted respectively to 2.4, 4.5, 3.6 and 1.8 per cent. However, since 2010 the recovery has turned anaemic and growth started decelerating. Like the recovery, the slowdown has also been near universal, underscoring the close economic and financial inter-linkages among nations. The 1.3 per cent fall in the EME growth, from 7.5 per cent in 2010 to 6.2 per cent in 2011, was substantial, but significantly less than the 50 per cent fall in growth (from 3.2 to 1.6 per cent) suffered by advanced countries. Among the major industrialised economies, the USA, the UK and Japan saw their output growth decelerate from as early as Q4 10. The euro area growth, which had been a modest 1.9 per cent in 2010,59 started decelerating sharply from Q2 11 and turned negative in Q2 12 (Table A.2). A spiralling debt crisis and galloping unemployment with falling output in many of its member countries have turned the euro zone into a veritable source of danger to the world economy. But the scenario elsewhere has not been too rosy either, with the threat of recession looming large over the UK, Japans GDP continuing to fall throughout 2011,60 large output gaps persisting in the USA and GDP growth continuing to slide unabated in China, India, Brazil and most other EMEs. The seriousness of the slide has been manifest most in the magnitude of unemployment with its attendant misery and erosion of human resources. Practically everywhere not only does unemployment as of now (mid 2012) remain far above the pre-crisis level, but its trend has also generally been northward. While the scenario in the euro zone crisis countries61 is now similar to what prevailed in the worst phase of the Great Depression, the problem of protracted unemployment has assumed alarming proportions in many other countries as well. Thus despite positive GDP growth since Q110 and substantial exit of disappointed jobseekers from the labour market, between Q4 10 and mid 2012, unemployment went up from 7.8 to 8.2 per cent in Great Britain, and from 9.7 to 10.1 per cent in France. Even in the USA,

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A spiralling debt crisis and galloping unemployment with falling output in many of its member countries have turned the euro zone into a veritable source of danger to the world economy. But the scenario elsewhere has not been too rosy either.

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Thanks primarily to resurgence in German GDP. Though growth has turned positive from Q1 12. 61 With unemployment at 24.8 per cent in Spain, 23.1 per cent in Greece, 15.4 per cent in Portugal and 14.8 per cent in Ireland.
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notwithstanding its legendary flexibility of the labour market and significantly better macroeconomic performance than most other advanced economies, it took two years for unemployment to fall by 1.2 pps to 8.7 per cent in Q4 11 from its peak (9.9 per cent) in Q4 09. The bleak employment scenario, apart from reflecting the extremely sluggish and fragile recovery, has severely dented consumer confidence and proved a major drag on almost all economies. Sources of Slowdown The slowdown was due in part to the operation of some supplyside factors. The earthquake, tsunami and disaster at a major nuclear power plant in Japan, the worlds third largest economy, pushed down the countrys GDP by 0.7 per cent in 2011 (compared with the 4.5 per cent growth clocked in the previous year). The contractionary impact of the calamity was magnified by (a) the fall in output elsewhere due to disruption in the global supply chain and (b) the decline in consumption62 triggered by the supply-induced loss of income. The more important supply shock consisted in the rise in petroleum prices due to political turmoil in the Middle East. Spot oil prices shot up from US$85.0 pb in Q4 10 to US$94.0 pb and US$102.6 pb respectively in the next two quarters, and remained at an elevated level thereafter until abatement of the turmoil and intensification of the euro crisis caused prices to soften and move southward from early May 2012. The shock negatively impacted the oil importing economies including the USA through an increase in the countries oil import bill and a reduction in demand for other goods because of a rise in the price of petroleum products. The role of the two shocks in the slowdown of global growth appears however to have been secondary. The negative impact of the calamity in Japan was mitigated in part by enhanced government expenditures on relief, rehabilitation and reconstruction.63Availability of substitutes of intermediate inputs produced in Japanthe world economy, let us recall, was saddled with considerable excess capacity also limited the damage due to disruption in the global supply chain.64 So far as the petroleum price shock is concerned, oil importing economies were no doubt adversely affected; but it needs to be noted that (a) the demand-reducing effect of the shock was too small to account for the slowdown suffered by these economies in 2011, and (b) in view of the benign impact of the shock on oil exporting countries

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So far as the petroleum price shock is concerned, oil importing economies were no doubt adversely affected; but it needs to be noted that the demand-reducing effect of the shock was too small to account for the slowdown suffered by these economies in 2011.

62 63

Of goods and services that were not supply constrained. Which the government was unlikely to incur in the absence of the

disaster.
64 To the extent the calamity reduced the output of consumer and capital goods, there would be little impact on world income: when aggregate output is demand determined, reduction in capacity in some region does not by itself reduce the level of economic activity.

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From as early as mid 2010, policy makers changed their track and came to believe that an easy money policy would be enough for sustaining recovery and the focus of macroeconomic programmes shifted to fiscal consolidation for reining in deficit and debt.

income and expenditure65 (including imports), its net consequences for the global economy was by no means as adverse as it might appear at first sight. Be that as it may, since the slide has remained unabated long after conditions in Japan and the Middle East have become normal, the two transitory phenomena, even if not inconsequential, cannot be considered crucial for a reasonably satisfactory explanation of the deteriorating economic scenario. The third supply-side factor at which many analysts point their accusing finger is the systemic troubles in the financial sector. In support of the thesis mention is made of how decimation of the financial system led to decade-long economic woes during the Great Depression and in Japan in the 1990s. A severe logjam in financial intermediation can no doubt cause severe and protracted unemployment and output gaps. However, as already noted, learning from these experiences policy makers all over the world not only flooded the market with liquidity through both conventional and unconventional routes, but also mounted large scale rescue operations of distressed banks. Thanks to these operations, by end 2009 balance sheets of banks were in good repair and their capital adequacy more than adequate by all reckoning. The main reason for the slowdown cannot thus be attributed to the lingering weakness of the financial system, especially when we remember that, banks in developing countries like India and China, which have been experiencing deceleration in their growth since 2010, remained mostly unscathed during the worst phase of the financial crisis. Even in the euro area the troubles being faced by banks are due primarily to the economic stagnation and decline and the consequent rise in non-performing assets (NPAs), and not so much to inadequate shoring up of banks balance sheets in the wake of the financial crisis. Policy Omissions and Commissions We have discussed in the previous section how the huge and orchestrated stimuli immediately after September 2008 averted a deep depression and effected a resumption of output growth in recession-hit economies by late 2009. However, from as early as mid 2010 policy makers changed their track and came to believe that an easy money policy would be enough for sustaining recovery and the focus of macroeconomic programmes shifted to fiscal consolidation for reining in deficit and debt. In fact, though the USA, Great Britain and Japan continued with the easy money policy, many EME central banks as also the ECB raised hiked their policy rates in 2011 on top of the debt-deficit reduction initiatives already adopted in these economies. The policy makers perception concerning the need for fiscal consolidation when output in advanced countries was as yet
Low price elasticity of demand for oil implies that even when its price rise was due to supply disruptions, total earnings of producers would go up.
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66

significantly below its pre-crisis level was, it cannot be sufficiently emphasised, completely at variance with Keyness teachings and lessons of history. The General Theory (Ch. 22) discusses at length how the effect of the collapse of a boom in fixed investment tends to be longlasting and the recovery painfully slow. Again, following the collapse private investment and consumption remain subdued even at a nearzero policy rate, given the huge excess capacity, the sharp rise in the debt burden of households due to crash in asset prices on the one hand and fall in incomes on the other, and the flight to liquidity along with the rise in lenders risk premia. Under such a scenario the Keynesian analysis underlines the urgent need for expansionary fiscal measures until reduction of unemployment and rising earnings have restored households confidence and effected a sufficient reduction in their debtincome ratio; growing capacity utilisation and profits backed by the perception that the authorities are committed to closing the shortfall in aggregate demand have caused a turnaround in private investment; and output growth has reduced significantly the NPAs of banks and risk premia of lenders. The fact that the housing boom and bust have caused a serious imbalance in the capital structure of countries like the USA, the UK, Spain and Ireland strengthens considerably the Keynesian case for fiscal stimulus for preventing a protracted stagnation. Given the hangover of large stocks of housing in relation to other fixed capital assets, until productive capacity and incomes generated in non-housing activities rise sufficiently, rent and house prices would be too low to permit a revival of residential investment and create conditions required for a self-sustained recovery. But the slump in residential construction itself precludes full capacity utilisation and a step-up in investment in the non-housing sector unless the government provides the required boost to aggregate demand.66 The relevance of the Keynesian theory and policy conclusions for the post-2010 slowdown may be illustrated with the experience of the US economy where monetary policy has remained expansionary throughout and the reversal of the fiscal stimulus programme has been considerably less than in most other countries. At the proximate level, one source of the US slowdown in 2011 was the sharp fall in incremental private investment67: its (y-o-y) growth jumped from 24.4 per cent in 2009 to 14.0 per cent in 2010, but slumped to 5.2 per cent in 2011. The main reason was the pronounced cyclicity, a la Keynes (pp. 3189), of growth in inventory investment, from 658.2 per cent in 2009 to 151.6 per cent in 2010 and then to 16.4 per cent in 2011. The important point to note in this context is that GDP growth in 2010 was
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The fact that the housing boom and bust have caused a serious imbalance in the capital structure of countries like the USA, the UK, Spain and Ireland strengthens considerably the Keynesian case for fiscal stimulus for preventing a protracted stagnation.

The boost can conceivably come from the exports sector, but not when countries that have not experienced the housing boom and bust are severely hit by contagion and do not undertake vigorous fiscal expansion. 67 Accounting for around 12.3 per cent of GDP.

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Take cognizance of the confidencesagging effects of the prospective withdrawal of a number of fiscal stimuli currently in force along with the contractionary consequences of the Fiscal Consolidation Programmes and identification of the villain of the piece even for the US economy seems fairly straightforward.

driven partly by the sharp rise in inventory investment from its abysmally low (negative) level in the previous year as producers tried to rebuild their stocks for sustaining the higher level of output. But once inventory holding had reached its optimum level, the rate of additions to stocks was liable to come down sharply unless GDP growth was pushed up by fixed investment or policy-driven components of aggregate demand. There was some revival of PFNI in 2011; but this was more than neutralised by the depressed residential investment and fiscal policy reversal. A perusal of Table A.1 suggests how crucial the premature attempt at fiscal consolidation was in triggering the slowdown in the US. Though the Bush tax cuts, originally scheduled to expire in end 2010, were extended by two more years and parts of the central government stimulus package consisting of the payroll tax cut, investment tax credit and enhanced unemployment insurance were to end only in January 2013, by early 2011 federal infrastructural spending had largely tapered off and the substantial support for states and local bodies under the Recovery Act come to a halt. As a result compared with the 0.7 (y-o-y) growth of government consumption and investment (GCI) in 2010, GCI recorded a 3.1 per cent fall in 2011.68 Though continuation of tax cuts, enhanced unemployment insurance, etc. spared the US economy from a double-dip recession, the role of the cutback in GCI behind the growth slowdown can hardly be overemphasised, remembering that (a) the share of GCI in GDP was a substantial 21.1 per cent in 2010; and (b) not only has GCI a much larger expansionary effect than tax cuts or transfers, but fiscal multipliers also tend to be high when output gap is large and the policy rate has hit the zero lower bound. Take cognizance of the confidencesagging effects of the prospective withdrawal of a number of fiscal stimuli currently in force along with the contractionary consequences of the Fiscal Consolidation Programmes (FCPs), and identification of the villain of the piece even for the US economy seems fairly straightforward. Policy omissions and commissions have been more glaring in Europe. In the UK monetary policy remained expansionary, with the BOE keeping the policy rate unchanged even after the recession had ended. But though compared with the USA the recession in the euro area was deeper, output revival slower and the employment situation significantly worse,69 not only were the ECBs policy rates (1.002.00
68 GCI had in fact been decelerating since mid 2009 but its growth remained positive throughout 2010 until the last quarter. From Q1 10 not only did the absolute level of GCI start falling, but the decline also tended to become progressively steeper. 69 In 2009 the euro area GDP declined by 4.4 per cent compared with the 3.0 per cent fall in the US output. In 2010 output growth was 2.4 per cent and unemployment 9.6 per cent in the USA; but in the euro area GDP growth was 1.9 per cent and unemployment 10.1 per cent.

68

per cent) higher than the federal fund rates throughout 2009 and 2010, but in 2011 the ECB also effected a 50 bp increase in the rate (to 1.50 per cent) in two stages, on April 13 and July 13.70 Much more damaging (and contra-Keynesian) than in the USA was the cutback in the fiscal stimulus programme in the euro zone as also in the UK. Apart from the serious hangover from the housing boom and bust in Great Britain and many euro area countries, private fixed investment, the main driver of self-sustained recovery, after a few quarters anaemic growth started decelerating sharply, from Q4 10 in the UK and Q2 11 in the euro area, and turned negative fairly soon (Table A.2). Even so, the cutback in fiscal stimulus in the UK and euro zone, initiated from Q2 10 and Q1 10 respectively, has remained in force. Thus growth in government consumption in Great Britain and the euro area declined from 0.5 and 0.7 per cent in 2010 to 0.2 and 0.3 per cent respectively in 2011. Given the large multiplier effect of government consumption and its 2324 per cent share in GDP in the two economies, the negative impact of the deceleration/decline of this component of autonomous demand was far from inconsequential. No less adverse were the effects of cutbacks in transfers along with tax increases, and of the erosion of consumer and investor confidence induced by fiscal retrenchments. We have already noted how from early 2011 private fixed investment suffered sharp deceleration and turned negative. Matters were made much worse by the downward shift in the consumption function, remembering that private consumption constituted around 60 per cent of GDP. From Q1 11 onward there was a sharp fall in the growth of household consumption relatively to that of GDP almost throughout the EU. Indeed, not only in distressed economies like Ireland, Italy and Spain, but in Great Britain also despite a positive (albeit declining) GDP growth, the level of household consumption fell in 2011 (Table A.2). The downward trend in the consumption-GDP ratio has become much more pronounced since Q4 11, contrary to what one would expect71 in times of stagnation or declining output. The sharp slowdown and resurgence of recessionary tendencies in Europe, it is thus clear, have been due primarily to (a) the direct, demanddebilitating effects of the FCPs when recovery was yet to take firm roots; and (b) the consequent negative impact of the programmes on consumers and private investors. Debt, Deficit and Fiscal Austerity Our analysis suggests why and how the FCPs in the euro zone, drawn up in utter disregard of Keyness teachings, have instead of
70 In fact, it was not until the crisis had assumed alarming proportions did the ECB cut the rate from 1.50 to 1.25 per cent on November 9 and to 1.00 per cent on December 14, 2011 and follow up the cuts by injecting a total of 1 trillion in two stages, first in December 2011 and the second in February 2012. But the stimulus was too little, too late.

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Much more damaging and contra-Keynesian than in the USA was the cutback in the fiscal stimulus programme in the euro zone as also in the UK.

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When countries in both the euro area and elsewhere were trying simultaneously to cut their deficits and debts, the mutually reinforcing contractionary effects of the programmes in a closely interconnected global economy tended to make them counterproductive.

resolving the debt-deficit problem made it much more intractable. Note first that the FCPs were based on too optimistic (and completely unwarranted) an estimate of the prospective revival of private consumption and investment. Second, the policy makers grossly underestimated the contractionary effect of the FCPs. One source of underestimation was neglect of the confidence-sagging effect of the withdrawal of the fiscal stimulus itself.72 There appears to have been little appreciation of the fact that, since under the programmes the cutback in deficits was to be achieved more through reduction in government spending than tax increases and since fiscal multipliers tend to be large in economies with large underutilised capacity and pervasive credit constraints, the negative consequences of the FCPs were likely to be substantial. Third, little account was taken of the spill-over effects of FCPs on other economies. When countries in both the euro area and elsewhere were trying simultaneously to cut their deficits and debts, the mutually reinforcing contractionary effects of the programmes in a closely inter-connected global economy tended to make them counterproductive. Finally, unlike an expansionary monetary policy including QE, the major part of the demand-creating effect of fiscal stimuli, especially of public consumption and investment, materialises almost immediately. The implication is that, even with a cheap money policy in force, a fiscal retrenchment in times of fledging recovery tends to drag the economy down.73 Add to that the ineffectiveness of monetary stimulus following a crash and rapid international transmission of cycles, and it is not difficult to appreciate how the orchestrated FCPs nipped the recovery in the bud and intensified both the recession and repayment problems of high-debt countries in the euro area. But what about the widespread perception among policy makers and the IMF regarding the spiralling costs of public borrowing undermining the viability of government finances and denting investors confidence? The perception was apparently justified by the sharp northward movement of interest rates on public debts of, and the payments problems faced by, the crisis country governments in Europe. But the remedial course of action being implementedcomprising continuation of FCPs everywhere along with severe austerity in crisis economies despite their shrinking levels of output and employment have intensified rather than helped in resolving the crisis. Fairly elementary considerations suggest why under the prevailing economic scenario cutbacks in fiscal stimuli (let alone fiscal retrenchments) do not make economic sense on grounds of either budgetary viability or longer term growth.
a la the permanent income or the textbook Keynesian hypothesis. In fact, there was a presumption among policy makers that the FCPs would boost investors confidence. 73 As happened in the United States in 1937 and Japan in 1997.
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First, the classical canons of fiscal prudence, Keynes never tires of emphasising, come into their own only when output is close to the full-employment level, not when productive capacity is grossly underutilised and private propensity to spend extremely weak. With zero marginal opportunity cost of resources, additional incomes generated through operation of fiscal multipliers then constitute a free lunch to the society in the short run. Second, while an increase in government expenditures on infrastructure, health and education adds directly to the economys stock of productive resources, such expenditures tend also to raise private investment because of their salubrious supply-side impact on expected returns on other categories of capital formation. Private investment is also positively affected by measures like time-bound schemes of investment tax rebates and the boost to aggregate demand and capacity utilisation effected by fiscal stimuli. The result is an increase in the economys full-employment level of output and government revenue in the medium run if not in the long run. Third, it is now widely recognised that large and prolonged unemployment and excess capacity lead to substantial withdrawal of discouraged jobseekers from the labour market; loss of skill and undermining of morale of the unemployed; reduced opportunities of learning by doing for younger workers, by far the worst victims of joblessness; and sharp cuts in firms expenditures on R&D. A fiscal stimulus programme can thus prevent a protracted slide in the economys productive capacity and the (full-employment) growth potential.74 Given the salubrious short and longer term effects of fiscal stimuli on the output (and hence of revenue) potential, the debt-deficit problem engendered by fiscal expansion would be far from intractable. One reason is that, even in the short run (with no supply-side effect), the deficit would be moderate if the government relies more on increases in expenditure, especially on infrastructural investment and HRD, than on tax cuts.75 What is no less important to recognise, in a depressed economy debt financing of budget deficits poses little problem when the government can borrow from the central bank: such borrowing does not add to the governments indebtedness to the public and hence to its future debt service obligations, remembering that the central bank itself is a government-owned organisation (Rakshit, 2005). The absence of such central bank accommodation amidst large scale unemployment and declining levels of economic activity suggests that, though orchestrated FCPs constitute the main reason behind the euro
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The classical canons of fiscal prudence, Keynes never tires of emphasising, come into their own only when output is close to the fullemployment level, not when productive capacity is grossly underutilised and private propensity to spend extremely weak.

Because of what is called the hysteresis effect (Phelps, 1972; De Long et

al, 2012).
75 In fact, given the difference among fiscal multipliers, a combination of various budgetary instruments can provide a pre-stipulated boost to aggregate demand along with a reduction in budget deficit (Rakshit, 2005). The problem in this context is more political than economic.

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Accelerating debt service obligations due to plunging revenues and large expenditures on bank rescues combined with fiscal austerity have created a vicious circle of falling incomes, rising deficits and debts, hardening interest rates on government bonds and deepening banking troubles with growing NPAs.

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crisis, at a more fundamental level its roots lie in the flawed design of the blocs economic arrangements: while a member country has little autonomy over its monetary, fiscal or exchange rate policies, there is no central authority entrusted with its macrostabilisation either. A glaring manifestation of the deficiency is the similarity between the deflationary policies pursued under the gold standard in pre-Keynesian days (when budget deficits were anathema) and the austerity measures being implemented for resolving the payments problems. As Keynes (Ch. 19) notes, for a small open economy the measures can conceivably provide a boost to aggregate demand through a fall in domestic vis--vis foreign prices. But it is much simpler to attain the same goal through devaluationan option not open to euro nations, but which Iceland, the worst victim of the global crisis, took full advantage of. Since both domestic deflation and devaluation are counterproductive when the economic malaise is pervasive among nations, absence of the exchange-rate-policy autonomy is not a major source of the problem. Much more serious is a governments inability to borrow from a national central bank and the absence of a lender of last resort to domestic banks. The result has been that, though government debts are denominated in euro (and were quite moderate to begin with in countries like Ireland and Spain), over the last five years their consequences have become similar to that under the gold standard. No wonder, accelerating debt service obligations due to plunging revenues and large expenditures on bank rescues combined with fiscal austerity have created a vicious circle of falling incomes, rising deficits and debts (as a ratio of GDP), hardening interest rates on government bonds and deepening banking troubles with growing NPAs. The euro crisis is generally ascribed to the unwillingness on the part of the rich euro zone countries like Germany to bear the cost of extending financial support to crisis countries. However, given the substantial excess capacity throughout the currency area, there is no opportunity cost of implementing in unison by crisis and non-crisis countries expansionary fiscal programmes, financed through borrowing from the ECB if and when necessary. This would enable the peripheral nations to bring down their deficit and debt (as ratios of GDP), remembering that (a) fiscal multipliers under collaborative FSPs tend to be large and (b) the northern nations account for the major part of the areas GDP. The enhanced revenue, reduction in expenditure on social security, etc. and salubrious impact of the FSPs on banks balance sheets imply that the net ECB finance needed for supporting the programmes would not be large even in the short run. Also substantial would be the gains of non-crisis countries by way of larger output and lower unemployment in the short run and higher (NAIRU) growth in the long run. It is the absence of such a perspective, reminiscent of the preKeynesian macroeconomics, that seems to lie at the root of the counterproductive policy package adopted by euro zone authorities

including the so-called troika (the European Commission, the ECB and the IMF).

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V. Summary and Conclusions

1. The lessons of the Keynesian economics that help in explaining the interplay of factors including policy omissions and commissions behind the global crisis are: (a) volatility of demand for fixed investments, especially when they are made highly liquid and the opinion of economic agents is similar; (b) impact of major shifts in the marginal efficiency of capital on inventory investment, liquidity preference and the consumption function, particularly when investments are debt financed; (c) the folly of relying on protectionist measures including devaluation or on domestic deflation; (d) superiority of fiscal to monetary policies for dealing with a collapse of the marginal efficiency of capital; and (e) major differences between macroeconomic consequences of fiscal prudence and private thrift in a fullemployment and demand-deficient economy. 2. The roots of the crisis lay in the boom and bust in residential investments, not in other fixed investments. But thanks to the similarity of the models used in churning out MBSs and assessing their risk-return profiles for purposes of portfolio management, investments in housing acquired all the characteristics that tend to foster speculative booms and busts and trigger a cumulative downturn as described in the General Theory. 3. An important non-Keynesian feature of the crisis was that the recession was relatively short and shallow. The reasons however are completely Keynesian. In terms of Keyness analytical framework it is not difficult to appreciate how in a closely interconnected world economy high growth in EMEs moderated the recession in advanced countries. Much more important was the role of the simultaneous and coordinated Keynesian expansionary measures implemented by practically all nations as soon as the crisis broke out. 4. Recovery of the world economy in late 2009 and 2010 soon gave way to a sharp slowdown everywhere, resurgence of recessionary tendencies in many countries, and outbreak of a spiralling debt crisis in the euro zone. While the genesis of the global slowdown may be traced to the orchestrated fiscal consolidation programmes being implemented by almost all nations since 2010, the euro area trouble is due primarily to the near-total lack of macro-policy autonomy of crisis countries compounded by the pre-Keynesian prescription being followed by the euro zone authorities and the IMF.

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An important nonKeynesian feature of the crisis was that the recession was relatively short and shallow. The reasons however are completely Keynesian.

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TABLE US Macroeconomic Profile: Q1 97Q2 12 I C R A A.1: BUL LE TIN

Money
GDP

1997 Q1 y-o-y growth rates 4.5 9.6 19.3 y-o-y growth rates 4.3 8.7 9.5 19.7 19.8 12.5 12.8 as % of GDP 16.2 y-o-y growth rates 16.7 1.6 4.1 as % of GDP 3.1 y-o-y growth rates 3.2 0.3 4.2 4.2 as % of GDI 21.6 y-o-y growth rates 12.0 11.5 11.6 11.4 as % of GDI 59.1 y-o-y growth rates 11.5 59.0 58.0 59.7 431.1 287.7 21.6 0.9 1.1 0.8 1.9 1.8 2.0 17.7 17.8 17.6 3.7 2.9 4.0 66.9 66.5 66.7 91.7 91.4 91.9 12.0 13.5 15.2 11.5 11.5 11.6 13.4 13.5 13.9 12.7 12.6 12.7 6.4 6.7 6.2 5.5 5.5 5.5 2.3 2.3 2.2 2.4 2.5 2.3 3.4 2.8 3.8 1.1 0.5 1.6 0.6 0.6 0.7 30.0 25.0 40.9 4.9 5.0 4.9 59.3 165.2 0.9 1.3 17.5 4.3 67.0 91.7 8.2 11.4 14.2 12.8 5.9 5.5 1.9 2.2 4.9 3.0 1.2 31.1 4.7 58.9 171.3 1.2 0.5 17.2 4.3 66.9 90.6 6.7 11.2 13.6 12.8 5.6 5.5 1.5 2.3 6.5 5.1 1.6 30.4 4.6 11.8 11.7 11.9 21.2 12.1 13.4 11.3 12.3 4.2 21.3 21.1 21.2 21.0 4.2 4.2 4.2 3.1 1.9 1.0 3.1 4.6 2.6 3.0 3.0 2.9 2.9 1.4 1.8 3.9 14.0 16.7 16.8 16.9 17.4 10.5 12.6 15.3 19.8 19.8 20.2 7.5 8.1 9.4 4.4 y-o-y growth rates Q2 4.5 4.7 4.3 4.5 3.9 Q3 Q4 Q1 Q2

1998 Q3 4.4 4.0 6.9 5.8 20.2 19.9 20.2 10.1 7.0 8.2 17.2 16.9 17.1 3.0 1.1 6.3 3.0 3.0 3.1 7.7 6.4 9.1 4.4 4.4 4.4 21.8 21.9 22.0 12.0 13.6 9.7 12.1 12.1 12.1 59.8 61.0 59.7 17.1 58.4 19.6 0.7 0.4 0.6 2.1 1.8 2.7 17.4 17.5 17.4 5.2 5.7 5.3 67.3 67.5 67.5 91.1 90.8 91.1 2.3 1.4 1.3 10.9 10.9 10.6 11.7 12.4 9.9 12.7 12.8 12.5 5.3 5.6 5.2 5.4 5.5 5.5 1.5 1.6 1.6 2.3 2.2 2.4 8.3 8.0 9.4 6.8 6.4 7.8 1.7 1.6 1.7 24.9 34.8 16.7 4.5 4.4 4.5 8.0 20.4 9.9 17.3 8.6 3.0 10.6 4.5 22.1 12.5 12.2 59.7 24.7 0.7 3.4 17.3 5.7 67.3 91.8 2.6 10.7 11.0 12.7 4.7 4.9 1.5 2.3 9.5 7.9 1.9 17.9 4.4 7.3 20.7 8.2 17.7 10.6 3.0 9.3 4.5 21.8 11.2 12.2 59.2 23.7 0.9 4.6 17.3 5.7 67.3 92.1 1.3 10.5 9.8 12.8 5.0 4.7 1.7 2.2 8.9 7.2 1.6 23.2 4.3 5.0 4.9 4.8 Q4 Q1 Q2

1999 Q3 4.8 4.8 7.2 7.5 6.7 20.6 20.4 20.6 8.8 9.1 8.8 17.5 17.3 17.5 7.8 8.1 4.3 3.1 3.1 3.1 6.3 7.2 5.0 4.6 4.6 4.6 22.1 22.4 22.2 10.5 10.3 11.8 12.3 12.4 12.5 59.9 60.8 60.7 0.9 4.9 26.4 0.6 0.4 0.4 3.6 2.8 3.2 17.4 17.4 17.5 5.5 5.5 5.4 67.8 68.0 68.0 93.2 93.3 93.8 4.4 3.7 6.9 10.6 10.5 10.6 11.5 10.7 13.2 13.4 13.2 13.6 5.6 5.5 5.9 5.0 4.7 5.1 2.2 2.1 2.3 2.1 2.1 2.0 9.4 9.3 9.3 7.2 7.1 7.0 0.9 1.1 0.6 22.3 19.8 23.7 4.2 4.3 4.2 7.2 20.8 9.1 17.7 8.2 3.1 3.8 4.6 21.9 8.5 12.3 58.9 51.3 0.9 3.9 17.5 5.3 67.9 93.7 5.6 10.7 12.3 13.9 6.1 5.3 2.6 2.0 10.2 7.6 0.3 22.5 4.1 4.8 Q4

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Gross Domestic SEPTEMBER.2012 as % of GDP Investment (GDI)

of which: private

public

Private fixed residential investment

as % of GDP

Private fixed nonresidential investment

as % of GDP

Changes in private inventories

1250.0 % share in GDP 0.6

Government consumption y-o-y growth rates expenditures and gross as % of GDP investment y-o-y growth rates

2.4 17.9 3.6

Personal consumption expenditures

as % of GDP 67.2 as % of personal disposable income y-o-y growth rates 91.7 11.0 as % of GDP 11.3 y-o-y growth rates

Exports of goods & services

Imports of goods & services

12.2 as % of GDP 12.6

10-yr yield on U.S. Treasury securities 6.6 Federal funds rate 5.3 CPI inflation 2.9 Core CPI inflation 2.5 Case-Shiller (CS) inflation 2.1 CS inflation CPI inflation 0.8 Y-o-Y growth rates of real rent 0.2 Y-o-Y growth rates of S&P 500 index 23.2 Unemployment rate 5.2

74

ICRA BULLETIN
2000 Q1 Q2 4.1 4.2 3.3 20.5 4.3 17.4 7.7 3.1 4.0 4.6 22.5 10.0 12.6 61.4 79.1 0.2 2.5 17.5 5.8 68.8 93.1 8.2 10.8 13.9 14.5 6.5 5.7 3.3 2.2 11.5 8.2 0.1 12.7 4.0 5.4 5.4 6.0 20.9 21.2 20.9 6.9 11.9 7.5 17.8 18.2 17.9 3.7 3.9 3.3 3.1 3.0 3.0 1.0 2.2 0.5 4.5 4.5 4.5 21.6 21.3 21.3 9.8 11.0 9.1 12.7 12.8 12.9 61.1 60.1 61.4 16.7 145.7 41.5 0.5 0.9 0.6 2.0 3.4 1.8 17.4 17.4 17.4 5.1 5.2 4.9 68.6 68.1 68.7 93.2 93.1 93.0 8.6 10.0 9.8 11.0 10.9 11.2 13.1 13.8 13.6 14.8 14.6 15.1 6.0 6.2 5.9 6.2 6.3 6.5 3.4 3.3 3.5 2.4 2.4 2.5 12.9 13.0 13.2 9.5 9.7 9.7 0.3 0.1 0.3 7.7 8.8 10.0 4.0 3.9 4.0 9.6 2.8 20.8 3.8 17.7 0.1 3.0 1.6 4.4 21.4 9.2 12.8 61.4 41.4 0.5 0.5 17.4 4.4 68.9 93.7 6.3 11.0 10.9 15.0 5.6 6.5 3.4 2.6 13.8 10.4 0.5 0.6 3.9 1.2 19.8 0.3 16.7 0.6 3.1 1.9 4.5 22.8 4.3 12.5 63.3 286.1 0.3 2.8 17.7 3.2 69.4 93.3 3.2 10.8 5.0 14.7 5.1 5.6 3.4 2.7 12.2 8.8 0.6 10.3 4.2 4.1 2.9 2.3 1.0 Q3 Q4 Q1 2001 Q2 1.1 0.6 0.4 6.5 6.2 7.4 11.2 19.3 19.7 19.3 18.4 6.9 7.0 7.5 12.9 16.2 16.5 16.2 15.2 3.5 7.3 0.7 5.3 3.1 3.2 3.0 3.2 0.6 0.2 2.5 1.5 4.6 4.6 4.7 4.6 23.8 23.2 24.2 25.2 2.7 2.1 4.8 8.2 11.9 12.0 11.8 11.3 61.9 61.1 61.5 61.7 200.4 110.6 148.8 256.1 0.4 0.1 0.3 0.8 3.8 3.6 3.7 5.2 17.9 17.9 18.0 18.2 2.7 2.7 2.1 2.8 69.5 69.1 69.4 70.1 93.5 94.0 92.0 94.6 5.5 3.0 10.2 12.0 10.0 10.3 9.7 9.3 2.7 1.1 6.8 7.8 13.6 13.8 13.2 12.7 5.0 5.3 5.0 4.8 3.9 4.3 3.5 2.1 2.8 3.3 2.7 1.9 2.7 2.6 2.7 2.7 10.3 10.6 9.6 8.7 7.4 7.3 7.0 6.8 1.6 1.1 1.9 2.7 16.3 14.7 21.8 18.4 4.7 4.4 4.8 5.5 1.6 4.0 18.7 5.0 15.5 6.4 3.2 3.8 4.7 25.0 9.5 10.9 58.5 56.6 0.1 5.3 18.4 2.8 69.6 92.4 9.4 9.3 4.1 12.8 5.1 1.7 1.2 2.5 7.2 6.0 3.4 11.1 5.7 Q3 Q4 Q1 Q2 2002 Q3 Q4 Q1 2003 Q2 Q3 Q4

Money
Q1 4.1 7.2 19.1 8.8 16.0 1.3 3.1 11.4 5.5 28.8 5.8 10.0 52.6 66.3 0.4 2.3 18.8 3.8 69.9 93.4 9.7 9.8 9.2 14.5 4.0 1.0 1.8 1.3 12.6 10.7 0.6 31.6 5.7

2004 Q3 Q4

1.8 1.5 2.3 1.9 1.2 3.4 0.9 3.5 18.7 18.8 18.7 18.7 1.2 3.6 1.2 4.9 15.5 15.5 15.4 15.4 5.0 1.5 8.7 3.5 3.2 3.2 3.2 3.2 5.2 4.9 4.9 7.4 4.8 4.8 4.8 4.9 25.6 25.5 25.6 26.3 7.9 8.6 7.4 6.0 10.6 10.6 10.5 10.2 56.6 56.7 56.1 54.9 145.6 225.2 164.3 136.3 0.1 0.1 0.2 0.3 4.7 4.1 5.2 4.0 18.6 18.6 18.7 18.9 2.7 2.9 3.1 1.9 69.9 69.8 70.0 70.2 92.9 92.4 93.3 93.4 1.8 3.8 2.1 4.0 9.4 9.5 9.5 9.4 3.5 2.2 6.4 9.7 13.4 13.4 13.6 13.9 4.6 5.1 4.3 4.0 1.7 1.8 1.7 1.4 1.6 1.3 1.6 2.3 2.3 2.4 2.3 2.1 9.3 8.2 10.1 11.6 7.7 6.9 8.6 9.3 2.3 2.8 2.1 1.0 16.8 13.3 22.4 20.5 5.8 5.8 5.7 5.9

1.5 0.6 18.6 1.6 15.4 1.1 3.2 5.6 5.0 27.0 4.0 10.1 54.3 308.6 0.3 2.2 19.0 2.1 70.2 93.5 1.4 9.3 5.7 13.9 3.9 1.3 3.0 1.8 12.4 9.4 0.1 24.0 5.9

2.5 1.8 3.0 2.6 0.1 3.3 18.7 18.4 18.7 3.9 1.0 4.4 15.5 15.2 15.5 1.4 1.1 2.1 3.2 3.2 3.2 8.2 5.4 10.2 5.2 5.1 5.2 27.7 27.5 28.0 1.4 0.2 3.0 10.2 10.2 10.2 54.5 55.4 54.6 28.5 126.1 84.8 0.1 0.0 0.0 2.2 2.8 2.3 19.0 19.2 18.9 2.8 2.6 3.2 70.0 70.2 70.0 93.2 93.1 93.0 1.6 1.6 0.4 9.3 9.2 9.3 4.4 3.7 3.2 13.9 13.8 13.7 4.0 3.6 4.2 1.1 1.2 1.0 2.3 2.0 2.2 1.5 1.5 1.4 11.2 11.2 10.3 8.9 9.2 8.1 0.6 1.0 0.7 1.4 12.3 11.7 6.0 6.1 6.1

3.9 6.5 19.1 8.4 16.0 1.4 3.2 11.5 5.4 28.3 6.4 10.3 53.6 16.4 0.3 1.6 18.7 3.4 69.7 93.0 6.2 9.6 5.2 14.1 4.3 1.0 2.0 1.2 11.0 9.0 0.7 19.2 5.8

&
3.9 11.6

Q2

Finance
3.0 9.2 9.7

3.5

2.9

8.3 20.1 8.4 17.0 1.5 3.1 6.6 5.9 29.2 7.0 10.6 52.4 86.9 0.6 0.6 18.8 3.3 69.9 92.8 7.2 10.1 11.0 15.8 4.2 2.0 3.4 2.2 16.3 12.9 0.5 10.1 5.4

SEPTEMBER.2012 19.7
19.8 19.9 10.1 12.8 10.3 16.6 16.6 16.8 1.8 3.0 1.5 3.1 3.2 3.2 9.9 13.0 8.6 5.7 5.7 5.8 29.1 29.0 29.3 6.2 5.7 6.2 10.3 10.2 10.4 52.2 51.7 52.3 1123.0 2348.6 1990.0 0.5 0.6 0.5 1.4 1.2 1.3 18.8 18.9 18.9 3.3 3.3 2.8 69.8 69.7 69.7 93.0 92.9 93.1 9.6 11.8 9.7 10.0 10.0 9.9 11.1 11.9 12.3 15.2 15.1 15.3 4.3 4.6 4.3 1.3 1.0 1.4 2.7 2.8 2.7 1.8 1.8 1.8 15.3 15.5 17.0 12.7 12.7 14.3 0.0 0.2 0.1 17.9 19.7 10.3 5.5 5.6 5.4

(continued on the next page)

75

ICRA BULLETIN

2005 Q1 Q2 3.1 3.3 3.1 6.1 9.7 20.3 10.1 4.3 20.3 20.0 5.6 3.7 17.2 17.2 16.9 1.9 1.2 1.0 3.1 3.1 3.1 6.3 7.6 6.1 6.1 5.9 6.1 30.2 29.3 30.5 6.7 8.8 7.5 10.7 10.6 10.7 52.6 52.0 53.2 18.5 80.3 81.2 0.4 0.1 0.1 0.3 0.0 0.5 18.8 18.8 18.9 3.4 3.8 3.7 69.7 69.8 69.9 94.9 94.7 95.0 6.8 6.6 7.2 10.3 10.2 10.4 6.2 8.8 5.8 16.1 15.7 15.9 4.3 4.3 4.2 3.2 2.5 2.9 3.4 3.0 2.9 2.1 2.3 2.1 15.8 16.6 15.9 12.4 13.5 13.0 0.4 0.0 0.0 6.8 5.2 5.2 5.1 5.3 5.1 5.0 5.0 4.7 10.9 5.8 7.7 0.9 0.5 0.6 11.3 11.9 10.0 15.1 15.5 13.7 2.0 2.1 2.1 3.8 3.7 3.7 3.5 4.0 4.5 4.2 4.5 4.6 16.0 16.6 16.6 4.9 5.2 6.6 6.6 10.3 10.5 10.7 10.9 6.5 6.7 8.8 8.3 95.1 94.8 94.0 93.8 53.3 51.7 13.1 0.6 0.7 18.7 2.8 69.7 53.1 28.0 0.5 1.6 18.8 3.1 69.3 10.7 10.7 11.1 6.1 4.5 8.0 30.9 30.1 29.6 6.2 6.3 6.2 6.1 5.3 2.3 3.1 3.2 3.1 1.5 3.9 5.0 17.0 17.6 17.8 3.5 5.1 4.4 20.1 20.8 20.9 4.2 6.2 6.0 7.3 3.1 2.8 3.0 3.0 Q3 Q4 Q1 Q2

2006 Q3 2.7 2.2 4.1 4.3 20.6 20.9 20.6 2.8 6.2 3.5 17.4 17.6 17.4 5.0 6.6 4.4 3.2 3.2 3.2 7.2 4.6 11.0 5.7 5.9 5.5 27.7 28.2 26.9 8.0 8.3 7.9 11.3 11.2 11.3 54.7 53.8 55.2 187.8 367.7 472.0 0.4 0.5 0.5 1.4 1.6 0.8 18.8 18.8 18.9 2.9 2.7 2.5 69.5 69.4 69.8 93.8 93.9 9.0 8.5 11.0 11.0 6.1 7.2 16.7 16.8 17.0 4.8 5.1 4.9 5.0 4.9 5.2 3.2 3.9 3.3 2.5 2.5 2.8 7.8 10.0 5.6 4.5 6.1 2.2 0.3 0.6 0.4 8.5 8.4 5.2 4.6 4.6 4.6 4.1 16.6 4.6 5.2 2.0 2.7 1.7 0.2 2.1 12.9 4.4 3.7 16.7 4.7 5.3 2.4 2.6 0.6 3.0 2.1 11.0 4.5 11.3 11.5 10.2 7.8 93.5 93.6 1.3 20.0 3.0 16.8 4.2 3.2 15.7 5.2 26.0 7.8 11.4 56.8 60.7 0.2 1.5 18.8 3.2 69.6 4.0 19.8 5.3 16.6 4.9 3.2 18.6 4.9 25.0 5.0 11.5 58.0 73.7 0.1 0.4 18.9 2.7 69.8 2.4 1.2 Q4 Q1 Q2

2007 Q3 Q4

Money
GDP

&

y-o-y growth rates y-o-y growth rates as % of GDP

Gross Domestic Investment (GDI)

Finance

SEPTEMBER.2012 y-o-y growth rates

of which: private as % of GDP y-o-y growth rates public as % of GDP y-o-y growth rates Private fixed residential investment as % of GDP as % of GDI y-o-y growth rates Private fixed nonresidential investment as % of GDP as % of GDI y-o-y growth rates Changes in private inventories 74.4 % share in GDP 0.7 y-o-y growth rates Government consumption expenditures and gross as % of GDP investment y-o-y growth rates 3.2 Personal consumption expenditures as % of GDP 69.5 as % of personal disposable income y-o-y growth rates as % of GDP y-o-y growth rates as % of GDP 10-yr yield on U.S. Treasury securities Federal funds rate CPI inflation Core CPI inflation Case-Shiller (CS) inflation CS inflation CPI inflation Y-o-Y growth rates of real rent Y-o-Y growth rates of S&P 500 index Unemployment rate 0.2 18.7

1.9 1.7 2.5 2.8 2.8 2.1 19.6 19.9 19.6 3.2 3.1 2.5 16.4 16.7 16.4 4.4 3.3 4.9 3.3 3.3 3.3 18.7 17.4 18.2 4.5 4.7 4.3 22.8 23.6 22.1 6.5 5.9 7.1 11.7 11.6 11.8 59.5 58.4 59.9 54.7 38.1 46.5 0.2 0.3 0.3 1.3 1.2 1.9 19.1 19.0 19.1 2.3 2.5 2.3 69.7 69.6 69.5 93.8 93.9 9.3 7.7 11.6 11.8 11.6 12.0 2.4 3.1 2.1 16.9 16.8 16.9 4.6 4.8 4.7 5.0 5.3 5.1 2.9 2.7 2.3 2.3 2.3 2.1 3.8 2.6 4.5 6.7 5.3 6.9 1.4 1.7 1.7 12.8 16.9 15.6 4.6 4.5 4.7 93.8

2.2 2.4 19.1 2.0 15.9 4.4 3.3 20.7 4.0 20.7 7.9 11.8 61.8 60.4 0.1 1.9 19.2 1.7 69.8

93.6 10.1 12.4 0.8 17.2 4.3 4.5 4.0 2.3 7.7 11.7 0.0 7.7 4.8

Exports of goods & services

Imports of goods & services

76

Source : Bureau of Economic Analysis, US Department of Commerce (www.bea.gov); Bureau of Labor Statistics, US Department of Labor (www.bls.gov); Standard & Poors (www.standardandpoors.com).

2008 Q1 Q2 Q3 Q4 Q1 Q2

2009 Q3 Q4 Q1 Q2

2010 Q3 2.4 0.1 14.0 14.8 12.8 11.3 2.1 3.5 13.3 2.5 16.8 15.7 9.1 61.4 51.7 0.3 4.0 21.4 0.3 70.5 1.9 0.5 15.1 5.0 11.6 3.0 3.4 6.4 2.4 15.9 7.7 9.0 59.7 120.3 0.2 2.7 21.2 0.7 70.6 2.8 7.8 9.9 15.0 15.5 15.5 15.8 14.0 17.5 22.6 12.0 12.0 12.3 1.6 1.6 0.5 3.5 3.5 3.5 3.6 5.0 7.2 2.3 2.5 2.3 15.2 16.0 14.3 0.9 0.3 3.7 9.2 9.2 9.3 59.7 59.3 58.6 151.6 117.9 152.3 0.4 0.3 0.8 0.7 1.1 0.1 21.1 21.2 21.1 1.8 1.8 1.9 70.5 70.4 70.3 91.8 91.6 11.2 12.1 12.7 12.8 12.5 15.9 16.2 16.4 3.2 2.8 0.2 0.2 1.7 1.2 1.0 0.9 1.3 1.6 0.4 0.4 1.4 1.1 21.7 10.1 9.6 9.5 2.5 2.4 6.8 15.4 10.7 12.0 1.1 3.4 5.7 2.3 14.6 7.7 9.4 61.0 216.0 0.3 1.3 20.8 2.9 70.6 1.8 2.0 15.1 4.4 11.9 3.7 3.3 3.2 2.2 14.8 6.8 9.4 62.1 0.7 0.2 2.3 20.6 3.1 71.3 1.9 Q4 Q1 Q2

ICRA BULLE TIN 2011 2012

1.6 4.2 18.6 4.2 15.3 4.8 3.3 23.8 3.6 19.4 6.0 11.8 63.5 172.3 0.1 2.8 19.7 0.9 70.2

0.3 1.0 0.6 8.1 6.4 8.8 18.1 18.5 18.0 10.2 7.7 11.1 14.6 15.0 14.5 6.5 6.7 7.6 3.5 3.4 3.5 23.9 24.3 23.3 3.3 3.4 3.2 18.2 18.6 17.9 0.7 2.8 2.0 11.6 11.7 11.6 64.1 63.5 64.2 311.7 131.6 205.5 0.3 0.1 0.3 2.6 2.4 2.6 20.1 19.9 20.4 0.5 0.4 1.0 70.2 70.2 70.4 91.0 91.5 6.3 11.3 6.4 12.9 13.3 13.4 2.7 1.4 3.3 17.9 18.5 18.7 3.7 3.9 3.9 1.9 2.1 1.9 3.8 4.3 5.3 2.3 2.3 2.5 15.8 15.5 16.9 19.6 19.8 22.2 0.1 0.7 1.5 17.1 8.4 15.9 5.8 5.3 6.0 90.3

3.3 13.1 17.2 17.8 13.6 6.9 3.6 24.4 2.9 17.1 9.4 11.2 65.3

4.2 20.6 15.4 26.3 11.8 4.2 3.6 26.2 2.7 17.2 16.7 10.4 67.1

737.3 1101.6 0.6 2.7 20.6 2.5 70.0 1.2 2.3 20.8 2.7 70.2

3.0 4.6 3.3 21.0 25.3 24.1 14.7 14.5 14.2 24.4 30.8 27.9 11.1 10.8 10.5 1.2 2.4 0.1 3.6 3.7 3.7 22.0 27.9 20.7 2.5 2.5 2.5 17.2 17.0 17.9 18.0 20.1 19.7 9.7 9.8 9.4 65.6 67.5 66.5 658.2 1206.3 376.4 1.1 1.5 1.4 3.7 4.3 4.1 21.2 21.3 21.5 1.9 3.1 1.6 70.5 70.3 70.9 91.8 92.7 9.0 10.5 11.4 11.4 13.4 13.7 14.1 14.3 3.3 3.5 0.2 0.2 0.3 1.6 1.7 1.5 13.0 11.5 12.7 9.9 2.6 3.6 19.1 20.5 9.3 9.6

1.8

Money
2.0 6.5 16.1 10.9 13.0 6.6 3.1 3.9 2.3 14.1 10.2 10.2 63.1 56.7 0.5 3.3 19.9 1.9 71.0

Q3

Q4

Q1

Q2

1.6 2.0 0.7 1.5 15.5 15.3 15.4 5.2 3.9 1.5 12.3 12.1 12.2 7.0 7.8 9.7 3.2 3.2 3.1 1.2 7.1 1.4 2.2 2.2 2.2 14.5 14.6 14.5 8.6 7.4 10.1 9.8 9.7 10.0 63.4 63.0 65.2 16.4 17.2 104.5 0.2 0.2 0.0 3.1 3.2 3.8 20.3 20.5 20.2 2.5 2.7 2.5 71.2 71.2 71.2 92.9 93.2 6.7 6.5 13.9 14.1 4.9 2.2 17.7 17.7 2.8 2.4 0.1 0.1 3.1 3.8 1.7 1.9 3.9 3.9 7.0 7.6 1.4 1.8 11.5 12.0 9.0 9.1

&

2.4 9.5

2.2 8.8

Finance
16.2 14.1 13.1 5.0 3.0 9.3 2.4 14.6 12.5 10.3 63.8 87.8 0.5 2.2 19.7 1.8 71.1

16.3 13.0 13.3 4.3 3.0 10.7 2.4 14.7 10.2 10.4 63.7 141.1

SEPTEMBER.2012

2.4 19.5 1.9 71.0

92.1 9.8 12.7 0.3 17.9 3.7 3.2 4.2 2.4 12.4 16.6 0.4 5.2 5.0

90.3 2.5 12.2 5.8 16.4 3.3 0.5 1.6 2.0 18.4 19.9 2.0 39.0 6.9

91.1 11.6 10.9 15.4 13.7 2.7 0.2 0.2 1.7 18.6 18.5 3.5 40.2 8.3

90.8 14.1 11.0 18.5 13.4 3.3 0.2 1.0 1.8 16.7 15.8 3.9 34.9 9.3

92.8 0.3 12.1 6.1 15.2 3.5 0.1 1.5 1.7 5.3 6.8 0.5 19.4 9.9

92.1 10.7 12.3 6.7 15.7 3.7 0.1 2.4 1.3 0.9 1.5 2.0 39.1 9.8

91.3 13.1 12.6 16.7 16.2 3.5 0.2 1.8 1.0 4.3 2.5 1.8 27.1 9.6

92.3 8.8 13.2 10.9 16.6 2.9 0.2 1.2 0.6 1.6 2.9 0.7 10.6 9.6

92.0 8.7 13.7 9.3 17.5 3.5 0.2 2.1 1.1 3.4 5.6 1.0 16.2 9.0

92.6 7.4 13.9 4.4 17.8 3.2 0.1 3.3 1.5 4.4 7.7 1.9 16.2 9.0

93.8 4.3 13.8 3.5 17.7 2.0 0.1 3.3 2.2 3.8 7.2 0.9 1.8 8.7

93.5 4.0 13.9 3.2 17.9 2.0 0.1 2.8 2.2 3.3 6.1 0.3 3.4 8.3

93.1 4.3 14.0 4.7 17.9 1.8 0.2

2.4 8.2

77

TABLE Economic I C R A A.2: BUL L E T I N Indicators of Some Major Countries: Q1 2008Q2 2012

Money
Euro Area

&

2008 Q1 Q2 Q3 Q4 Q1

2009 Q2 Q3 Q4 Q1

2010 Q2 Q3 Q4 Q1

2011 Q2 Q3 Q4

2012 Q1 Q2

GDP (y-o-y growth)

Finance
2.0 1.2 1.9 2.3

0.3 0.0 2.3 2.4 2.6 2.7 2.2 5.4

4.4 5.3 4.4 2.6 2.7 22.3 21.1 22.0 22.3 22.4 22.4 22.2 2.6 2.5 1.4 0.8 2.3 1.0 2.2

1.9 2.2 0.7 0.5 0.0 0.0 2.2 2.4 1.7

1.5 1.3 0.7 0.0 0.4

SEPTEMBER.2012 General government final consumption expenditure (y-o-y growth)

General government final consumption expenditure (% of GDP) 20.1 Household final consumption expenditure (y-o-y growth) 1.6 Household final consumption expenditure (% of GDP) 56.0 Investment (y-o-y growth) 1.0 Investment (% of GDP) 22.6 Gross fixed investment (y-o-y growth) 2.2 Gross fixed investment (% of GDP) 21.9 Exports of goods and services (y-o-y growth) 5.3 Exports of goods and services (% of GDP) 42.7 Imports of goods and services (y-o-y growth) 4.3 Imports of goods and services (% of GDP) 41.3 General government gross debt (% of GDP) 67.3 CPI inflation 3.4 Core-CPI inflation 1.8 Unemployment rate 7.3 Germany GDP (y-o-y growth) 2.8 General government final consumption expenditure (y-o-y growth) 2.3 General government final consumption expenditure (% of GDP) 17.9 Household final consumption expenditure (y-o-y growth) 1.4 0.4 3.4 1.8 7.5 1.7 3.6 2.8 3.7 0.7

0.3 0.2 0.4 21.5 21.9 21.6 21.5 21.5 0.2 1.1 1.2 1.0 0.2 57.4 57.7 5.5 19.2 57.5 5.2 19.9 57.2 57.3 2.1 3.3 3.3 19.7 20.1 19.5 1.6 1.4 1.6 19.0 3.7 19.4 1.2 19.3 19.3 19.2 6.4 11.8 10.0 6.4 5.7 3.5 3.0 19.2 18.3 0.8 0.7 2.6 19.0 18.6 1.4 1.4 6.8 57.6 57.7 0.2 0.7 0.7 21.5 21.6 0.7 0.0

20.6 20.4 20.6 0.4 0.0 0.9 1.6

22.0 22.0 21.9 0.9 0.3 0.6 0.7 57.5 57.6 57.6 4.0 19.0 57.3 5.7 19.2 18.3 19.6 19.2 57.3 2.6

1.1 1.4 1.2

56.3 56.2 0.4 22.3 56.5 2.1 22.3 56.7 57.3 1.9 22.2 21.5 20.1

57.5 57.6 57.4 15.8 6.1 14.3 18.0 18.7 16.3 14.5 18.6 18.9

1.3 0.6 21.6 1.4 21.5 0.9 0.7 21.5 21.0 20.1

12.3 6.5 12.5 13.6 19.5 13.0 10.2 19.2 19.0 4.4 18.9 19.5

0.2 0.6 19.1 19.3 19.2

12.5 6.3 16.1 16.3 12.6 5.0 7.2

11.0 13.0 12.1

42.0 42.6 42.6 0.8 0.7 40.0 36.4

36.7 35.9 36.9 37.6 38.7

40.9 40.7 41.7 9.5 6.2 4.3 12.0 10.4 11.1 8.3 42.4 43.2

43.8 43.6 44.3 4.2 4.5 42.4 41.1 42.2 42.5 42.7 86.9 85.3 2.0 1.1 10.1 86.2 2.5 1.1 9.9 87.1 86.8 2.7 1.7 2.8 1.6 10.2 10.0 10.2 3.1 4.0 3.8 4.6 2.9 2.7 1.2 1.5 1.2 0.2 1.7 19.5 19.6 19.5 19.6 19.4 1.4 0.9 1.8 2.2 0.8 1.7 0.8 0.8 1.5 19.6 19.6 1.1 1.6 1.9 2.0 1.2 1.0 10.6 10.9 2.7 1.4 1.0 1.3 1.6 1.6 1.6 2.9 2.7 2.5 87.3 88.2 42.3 42.8 3.6 0.3 0.7 44.2 44.9

11.3 4.7 12.7 14.7 11.7

41.1 41.5 42.1 39.3 35.8

35.4 34.4 35.3 35.9 37.4

39.6 39.6 40.2

68.2 67.6 67.7 3.3 3.9 1.8 1.8 7.7 7.7 0.8 0.5 3.1 3.5 3.2 3.4 1.9 6.8 8.1 9.0 1.9 1.6 2.3 1.0 70.1 73.9

77.5 77.1 0.2 1.6 9.6 9.5 5.1 6.2 5.0 3.3 2.9 20.1 18.9 20.1 20.1 20.1 19.9 20.2 3.6 3.4 2.6 2.2 2.4 9.8 10.0 10.1 79.0 0.3 0.4 1.4 1.3 1.1 0.9 0.4 1.1 79.9 81.6

83.2 82.9 1.6 1.0 0.9 10.1 10.2 10.1 3.6 4.1 1.7 1.3 19.8 19.7 19.6 0.5 0.3 0.6 0.2 83.0 1.6

18.3 18.2 18.3 0.5 0.2 0.0 0.0

0.1 0.4 0.5

78

(continued on the next page)

2008 Q1 Household final consumption expenditure (% of GDP) 54.0 Gross investment (y-o-y growth) 1.3 Gross investment (% of GDP) 19.8 Gross fixed investment (y-o-y growth) 3.2 Gross fixed investment (% of GDP) 18.7 Exports of goods and services (y-o-y growth) 7.1 Exports of goods and services (% of GDP) 48.6 Imports of goods and services (y-o-y growth) 4.9 Imports of goods and services (% of GDP) 41.6 Current account balance (US$ billion) 66.0 Current account balance (% of GDP) 7.1 General government gross debt (% of GDP) 65.4 CPI inflation 3.1 Core-CPI inflation 1.6 Unemployment rate 8.0 France GDP (y-o-y growth) 1.6 General government final consumption expenditure (y-o-y growth) 0.9 General government final consumption expenditure (% of GDP) 22.9 Household final consumption expenditure (y-o-y growth) 1.6 Household final consumption expenditure (% of GDP) 54.7 Gross investment (y-o-y growth) 3.2 Gross investment (% of GDP) 22.3 0.7 0.8 0.2 0.5 0.5 1.3 1.4 1.9 2.1 2.3 4.3 7.7 1.1 7.5 7.2 7.2 7.6 3.0 6.9 66.1 66.3 65.8 2.8 3.3 1.3 1.3 1.3 1.3 1.7 0.8 66.7 68.8 4.0 41.8 41.5 43.1 41.1 38.7 5.1 48.0 48.6 48.6 3.0 4.0 0.9 46.3 42.1 2.0 18.6 18.4 18.6 2.2 2.3 18.7 17.6 1.0 19.4 18.9 19.9 1.0 1.6 18.9 17.6 Q2 Q3 Q4 Q1

2009 Q2 Q3 Q4 Q1

2010 Q2 Q3 Q4

ICRA BULLETIN
2011 2012 Q1

Money
Q2 Q3 55.8 55.4 55.8 8.1 8.6 6.8

Q4

Q1

Q2

54.7 54.3 55.0 0.8 1.6 55.6 57.3

56.9 57.5 56.6 56.3 56.2 0.2 16.9 15.7 0.6 13.9 18.7 15.8 15.6 14.4 16.7 15.9

56.0 55.9 17.6 17.3 17.7 17.3 5.2 0.7 16.9 6.5 17.5 17.0 17.6 17.7 17.6 18.1 7.5 7.4 11.5 17.2 17.9 55.7 9.5 7.9 12.4 9.6 56.1 55.9

&

Finance
56.0 7.4 55.8 0.1 18.1 17.7

16.5

18.2

SEPTEMBER.2012

18.7 18.1 6.7 5.5 4.2

11.3 2.8 12.5 11.5 17.2 11.2 10.1 17.1 17.2

5.6 18.3

0.3 18.0

18.2 18.1 18.1 8.5 13.9 12.5 7.5 8.2 5.6 5.2

13.5 5.6 16.7 17.3 13.7 6.4 7.9

13.4 16.7 15.1

41.9 40.9 41.9 42.7 43.9

46.7 46.7 47.8 48.2 49.1

50.1 49.9 51.0 7.9 14.7 9.8 6.9 8.5 6.3 5.0 50.3 51.1

9.2 8.0 11.8 9.9 7.1 3.4

11.6 16.1 12.2

37.0 35.9 36.8 36.4 38.8

41.3 41.6 42.1 42.7 43.9

45.1 45.2 45.8 204.7 59.8 53.5 45.7 53.4 5.7 6.1 7.0 6.2 5.0 5.8 6.0 6.1 52.1 51.9 45.6 45.8

227.0 67.0 54.4 6.2 5.9 5.0 4.3 39.6 32.9

197.7 45.0 56.6 5.9 5.6 72.5 72.8 0.2 1.6 7.8 7.9 3.0 3.7 3.1 2.6 2.6 24.8 23.8 24.3 24.7 25.0 0.2 1.0 0.8 0.0 56.0 55.2 55.8 56.1 56.1 18.3 11.5 18.2 18.9 56.1 6.0 18.6 15.5 6.2 13.9 18.1 21.3 19.9 18.7 0.3 1.3 1.4 25.1 25.0 2.7 2.8 2.6 1.0 1.0 7.9 7.7 7.5 73.9 0.2 0.4 1.3 1.3 1.2 0.8 0.3 0.8 74.4 74.6 6.6 7.1 5.5 63.2 45.8

196.3 41.7 48.9 6.0 5.3 77.2 75.4 1.0 0.6 0.4 7.1 7.2 1.6 1.6 1.7 2.1 24.9 24.9 24.8 1.4 1.2 56.0 55.9 2.1 19.2 19.3 19.6 19.4 20.9 55.9 1.4 6.4 3.1 12.9 56.1 55.9 1.8 1.3 1.4 24.8 24.6 1.5 0.7 0.5 1.9 1.7 2.4 6.9 6.7 6.3 0.6 0.7 0.9 75.6 1.2 1.2 1.6 2.2 83.0 82.0

81.7 81.8 81.6 2.5 2.5 1.4 6.0 2.6 1.2 1.3 6.0 5.9 1.7 1.7 1.5 0.3 0.1 0.1 0.3 0.8 1.3 1.2 0.3 0.3 5.6 5.6 1.2 1.3 1.4 2.6 2.4 2.1 81.2

23.3 23.1 23.4 0.2 0.4

24.6 24.6 24.5 0.2 0.2 0.2 55.6 55.5 55.5 8.0 9.7 6.5 3.0 20.1 4.7 2.9 20.0 20.6 20.8 20.7 55.5 55.8 0.7 0.5 0.2 24.5 24.5

55.0 55.1 0.7 22.1 55.1 1.9 22.0 1.1 21.9

18.9

(continued on the next page)

79

ICRA BULLETIN

2008 Q1 Q2 Q3 Q4 Q1

2009 Q2 Q3 Q4 Q1

2010 Q2 Q3 Q4 Q1

2011 Q2 Q3 Q4

2012 Q1 Q2

Gross fixed investment (y-o-y growth) Gross fixed investment (% of GDP) Exports of goods and services (y-o-y growth) Exports of goods and services (% of GDP) 27.6 Imports of goods and services (y-o-y growth) 4.6 Imports of goods and services (% of GDP) 29.3 Current account balance (US$ billion) Current account balance (% of GDP) 1.2 General government gross debt (% of GDP) 65.8 CPI inflation 3.3 Core-CPI inflation 1.8 unemployment rate 7.5 Italy GDP (y-o-y growth) 0.4 General government final consumption expenditure (y-o-y growth) 0.1 General government final consumption expenditure (% of GDP) 19.5 Household final consumption expenditure (y-o-y growth) 0.0 Household final consumption expenditure (% of GDP) 58.7 Gross investment (y-o-y growth) 0.0 Gross investment (% of GDP) 21.9 Gross fixed investment (y-o-y growth) 1.1 Gross fixed investment (% of GDP) 21.3 Exports of goods and services (y-o-y growth) 2.8 0.6 7.6 1.8 3.7 1.0

Money

&

0.2 5.2 21.5 2.4 21.6 0.9 21.4 21.3 20.6 20.0

10.4 6.1 11.0 11.7 19.5 11.1 19.5 19.3 19.2 19.1 7.8 3.6 0.8

1.1 3.3 19.5 9.2 5.7 5.9 9.6 10.8 10.5 7.4 5.1 3.7 19.6 5.0 19.9 3.3 19.4 19.4

3.6 2.4 3.5 20.4 1.1 20.3 1.3 20.1 20.0 20.1 5.5 4.4 5.1 4.0 3.2

Finance

SEPTEMBER.2012

0.7 4.1 0.3 0.9

11.7 6.1 15.3 13.8 12.1 23.4 25.5 23.4 23.2 23.4 9.4 2.7 10.0 11.5 11.3 25.2 27.7 25.4 24.7 24.8 25.9 26.3 4.9 2.8 9.0 23.6 24.6

26.9 27.3 27.3 0.7 0.3

25.5 25.4 25.9 8.5 13.1 9.0 10.7 26.2 26.5

26.9 26.7 27.1 5.3 6.0 2.9 1.5 1.0 1.4 27.4 27.5

29.1 29.5 29.7

27.7 27.5 28.3 28.5 30.0

29.7 29.6 29.8 54.7 9.0 14.8 29.5 29.9

50.0 8.9 16.3 15.7 1.7 2.2 2.2 1.4 1.4 9.1 8.4

34.5 9.8 4.0 12.3 1.3 1.5 0.6 75.9 68.2 2.0 1.7 8.2 71.5 0.7 1.6 8.9 75.4 0.2 1.5 9.5 9.5 5.5 3.0 6.9 6.5 5.1 0.8 0.9 0.8 1.2 21.4 20.5 21.2 21.3 21.6 1.6 1.5 2.5 2.1 1.4 59.9 59.2 59.6 59.8 60.0 60.3 60.2 2.9 19.8 16.9 7.7 18.2 20.9 21.1 19.9 18.7 15.5 13.1 18.8 18.2 18.5 0.3 0.9 21.3 21.2 0.6 0.5 0.1 3.5 1.1 77.5 0.1 0.5 1.4 1.5 9.6 1.1 10.0 1.0 9.9 0.4 1.5 79.1 81.2 1.8 1.2 8.0

40.5 7.9

9.6 15.0 16.4 15.9 13.4 2.0 2.3 2.4 2.2 1.9 85.5 82.5 1.9 1.0 9.7 84.5 2.0 0.8 9.6 86.2 85.4 2.3 1.8 1.0 1.0 9.8 9.8 1.8 2.2 1.2 9.6 2.3 1.1 1.0 9.7 9.6 0.6 1.9 2.3 1.3 1.0 0.4

1.6 1.3 1.5

1.3

2.2

66.8 66.3 66.8 3.2 3.6 1.8 1.8 7.8 7.8

82.4 83.7 1.8 0.9 9.7 82.0 1.7

86.0 2.6 1.4 9.8 2.6 1.5 10.1 2.3 1.7

1.2 0.3 1.8 0.6 0.7

1.8 0.6 0.6

0.5

1.4 2.5

0.9 1.1 0.2 0.9 1.1 20.5 21.0 20.7 20.4 20.4 0.2 1.4 1.5 1.3 1.1 0.2 60.9 60.8 12.0 20.4 60.8 1.8 20.7 60.7 60.8 3.8 7.8 1.1 4.5 11.4 14.3 19.6 20.3 19.3 1.2 3.8 1.7 19.5 0.5 19.8 0.2 1.9 19.6 19.7 19.5 6.4 13.0 10.0 6.6 6.1 2.9 1.7 19.2 18.8 3.2 7.6 18.2 17.5 61.2 61.4 1.3 2.4 20.6 20.8 1.3 1.2

0.6

20.1 20.2 20.0

21.1 21.2 21.1 1.2 0.9 60.3 59.7 9.4 20.2 20.6 19.9 1.7 7.7 19.3 0.7 19.4 2.1 19.5 19.5 19.7 60.4 8.0

0.8 0.6 1.1

58.8 58.1 0.8 22.0 59.3 6.9 21.5 3.9 21.6

3.8 1.6 21.0 4.3 21.2 21.0 20.5 19.9

11.6 8.2 12.5 13.6 19.3 12.7 19.4 19.1

2.8 0.3

17.5 16.3 9.2 7.9

11.4 12.4 12.2

4.0 10.2 22.9 21.4

80

(continued on the next page)

2008 Q1 Exports of goods and services (% of GDP) 29.6 Imports of goods and services (y-o-y growth) 1.4 Imports of goods and services (% of GDP) 30.0 Current account balance (US$ billion) 18.6 Current account balance (% of GDP) 3.1 General government gross debt (% of GDP) CPI inflation 3.3 Core-CPI inflation 2.2 Unemployment rate 6.4 Spain GDP (y-o-y growth) 2.7 General government final consumption expenditure (y-o-y growth) 5.6 General government final consumption expenditure (% of GDP) 18.9 Household final consumption expenditure (y-o-y growth) 2.5 Household final consumption expenditure (% of GDP) 56.6 Gross investment (y-o-y growth) 0.5 Gross investment (% of GDP) 30.3 Gross fixed investment (y-o-y growth) 0.1 Gross fixed investment (% of GDP) 29.9 Exports of goods and services (y-o-y growth) 1.8 Exports of goods and services (% of GDP) 26.4 Imports of goods and services (y-o-y growth) 1.0 5.4 1.9 5.9 5.9 6.7 5.7 0.9 0.3 1.4 3.5 6.9 2.2 6.8 6.8 7.0 7.3 3.8 Q2 Q3 Q4 Q1

2009 Q2 Q3 Q4 Q1

2010 Q2 Q3 Q4

ICRA BULLETIN
2011 2012 Q1

Money
Q2 Q3 28.8 28.5 29.2

Q4

Q1

Q2

28.5 28.8 28.5 26.9 23.4

23.7 23.2 23.8 24.3 25.1

26.5 26.2 26.9 27.8 28.2

&

Finance
29.3 29.6 29.8 29.7

2.9 0.1 5.0

13.4 8.0 17.4 18.0 12.1 6.2 7.7

12.4 13.4 13.2 15.4 8.7

1.3 3.6 SEPTEMBER.2012 0.0 7.3 9.0 30.3

29.3 29.5 29.6 28.0 24.5

24.2 23.4 24.1 24.9 26.7

28.4 28.0 28.7 30.3 30.8

30.4 30.1 47.2

66.1 8.0 19.8 19.1 13.2 2.9 1.3 3.4 3.7 2.7

41.8 9.6 11.9 6.8

44.7

18.3 17.1 17.5 18.9 24.7 20.6 15.0 3.5 3.1 3.6 4.6 3.6 2.7 120.0 2.9 1.7 1.7 1.7 8.4 8.3 2.0 1.7 8.3 2.3 1.5 7.9 2.9 2.2 8.2 2.7 2.0 1.8 8.5 0.7 0.4 0.2 0.7 0.9 0.8 2.2 0.2 0.9 0.6 2.1 3.6 20.3 20.7 21.0 20.4 19.9 0.1 0.8 0.8 0.4 0.3 57.2 57.5 5.0 22.8 57.0 4.8 22.6 57.2 57.2 5.3 5.4 4.2 22.1 22.4 22.1 5.1 5.4 22.3 4.9 22.1 5.4 4.0 21.7 22.0 21.7 9.1 14.9 13.1 8.8 30.1 27.4 28.8 29.4 32.7 0.1 7.0 8.0 6.0 1.3 0.9 9.2 0.5 0.8

9.0

2.0 1.9 2.2 1.2 3.4

3.5

3.5

1.7

105.2 3.5 4.1 2.2 2.3 2.3 1.6 2.9 1.4

114.7 117.0 116.0 0.8 0.9 1.6 1.8 7.8 7.6 3.8 4.4 4.0 3.8 4.6 21.3 20.3 20.9 21.3 21.5 21.6 21.3 3.3 1.4 0.6 3.1 1.3 8.0 8.2 8.5 1.4 1.6 1.5 0.1 0.7 1.3

118.7 1.6 1.6 1.7 8.6 0.1 0.0

105.6 105.0 104.5 105.7 111.8 113.9

118.0 118.8 119.4 118.6 119.5 121.0 119.3 120.1 3.7 2.6 9.1 3.6 2.2 9.8 3.6 2.3

8.4

0.3

0.4 1.0

1.0 21.1 21.4

3.6

5.2

19.5 19.2 19.7

21.0 0.8

19.9

19.9

0.6 0.6 1.3 4.2 5.6

4.4 5.8 4.0 2.3 0.1 1.5

1.1

0.6

56.3 56.6 1.7 29.8 56.1 55.8 54.5 4.2 29.1 28.8 27.5 25.8

55.2 54.9 55.2 56.0 56.1 9.6 23.6 16.5 16.9 14.6 23.9 23.7 24.4 24.2

56.7 56.8 4.1 23.7 56.4 5.2 23.1 6.0 23.3

57.5 6.6 21.2

58.1 8.1 20.7

4.5 11.0 15.1 19.2

4.7 2.2 29.4 28.7 28.4 27.1 25.4

16.5 16.9 14.6 23.5 23.2 9.8 23.2 24.0 23.8

6.3 4.3 23.2 5.5 22.7 22.9

5.2 11.5 15.3 19.3

6.2 20.8

8.2 20.3

1.0 2.8 1.5

10.2 7.2 16.1 15.2 9.1 0.4 11.9

13.5 15.3 11.8

5.2

2.2

26.6 26.9 29.0 23.9 22.6

23.9 23.5 26.0 23.5 24.7

27.0 26.6 29.4 9.0 6.7 6.3 14.5

29.6

30.0

5.1 1.0

16.9 15.2

5.4 15.1 22.3 23.3

5.9

7.2

(continued on the next page)

81

ICRA BULLETIN

2008 Q1 Q2 Q3 Q4 Q1

2009 Q2 Q3 Q4 Q1

2010 Q2 Q3 Q4 Q1

2011 Q2 Q3 Q4

2012 Q1 Q2

Imports of goods and services (% of GDP) Current account balance (US$ billion)

Money

&

32.3 33.4 33.5 32.9 29.4 25.0

25.7 24.6 26.4 26.9 27.3

29.1 29.5 29.4 30.3 31.0

30.7 30.6 31.1 52.6 30.2 30.5

Finance

154.6

70.2

62.6

SEPTEMBER.2012 39.9 44.3 41.5 28.9 20.6 12.9 19.0 17.7 15.0 16.6 18.2 12.8 16.5 12.1 15.2 8.8
Current account balance (% of GDP) General government gross debt (% of GDP) 35.5 CPI inflation 4.5 Core-CPI inflation 2.4 Unemployment rate 9.2 Ireland GDP (y-o-y growth) 0.5 General government final consumption expenditure (y-o-y growth) 2.2 General government final consumption expenditure (% of GDP) 18.5 Household final consumption expenditure (y-o-y growth) 3.5 Household final consumption expenditure (% of GDP) 50.0 Gross investment (y-o-y growth) 12.5 Gross investment (% of GDP) 23.6 Gross fixed investment (y-o-y growth) Gross fixed investment (% of GDP) 24.8 Exports of goods and services (y-o-y growth) 0.7 Exports of goods and services (% of GDP) 81.8 Imports of goods and services (y-o-y growth) 0.5 Imports of goods and services (% of GDP) 74.4 Current account balance (US$ billion) 4.5 2.3 2.1 1.0 0.0 1.3 0.2 0.5 1.1 6.9 6.1 5.5 5.0 6.7 4.1 2.5 0.8 1.7 4.6 5.7 6.7 4.4 3.6 3.8 3.2 0.8 0.4 0.6 2.6 4.3 4.7 3.5 18.4 19.8 19.0 18.4 18.6 2.3 1.6 0.5 1.6 2.3 4.0 48.8 51.3 50.1 48.0 48.4 8.7 1.2 10.7 15.0 10.9 11.5 11.6 11.4 10.8 12.5 6.6 17.9 18.0 10.2 11.6 11.0 10.3 5.1 8.3 6.3 6.5 104.9 3.0 4.6 6.0 9.6 9.7 11.0 7.5 6.5 9.9 11.4 7.8 3.6 48.5 47.8 1.4 2.2 17.6 18.4 5.9 3.4 1.4 0.8 2.9 1.4 2.2 11.4 10.5 11.8 14.0 16.7 4.7 9.6 9.8 10.4 10.1 37.2 36.0 36.9 4.1 5.0 2.4 2.5 2.5 1.6 1.2 18.0 17.9 18.5 19.0 19.4 2.5 0.5 40.2 43.5 8.2 6.0 4.8 3.6 5.1 4.6 4.2 4.5 5.0 5.4 3.6 4.5 3.5 3.1 4.0 66.3 61.2 2.5 1.2 20.5 64.7 3.2 1.1 20.7 66.1 66.0 3.1 2.0 0.8 0.5 0.3 0.1 0.8 20.1 20.1 20.3 1.1 1.4 21.7 20.9 22.0 23.0 23.8 3.3 2.9 1.2 1.0 1.1 0.8 0.8 2.7 1.9 1.9 68.5 2.4

48.8 47.5 0.7 50.2 1.0 0.9 53.9 0.2 55.7 1.3 0.2

58.4 57.8 2.3 58.8 2.0

3.7 2.6 5.4

19.2 19.4 19.2 19.7 20.9

20.4 20.1 20.3 20.4 19.2

19.2 19.0 18.8 0.6 4.3 0.5 0.7 50.0 49.9 49.2 49.5 49.9 20.0 28.2 16.6 14.8 20.3 12.0 13.0 11.6 12.7 12.2

0.3 0.6 0.8 3.3 6.9

5.7 5.2 6.4

50.5 50.5 7.6 21.2 50.7 50.7 48.8 13.3 21.2 22.5 17.4 15.2

49.2 49.0 49.2 30.4

7.8 40.9 32.0 31.7 14.6

38.1 19.6 14.0

14.2

10.1 6.4 10.7 21.4 21.9 22.7 18.8 17.0

27.1 30.2 22.7 15.8 14.6 15.9 16.1 11.9

22.6 28.6 15.9 23.1 22.6 12.0 13.0 11.5 6.2 3.2 1.6 4.7 10.1

1.7 21.6 31.6 24.0

1.1 0.1 1.2 3.8 4.2

3.9 3.8 4.2

84.0 83.1 83.9 87.3 90.2

90.8 90.9 90.7 91.5 95.4

101.0

99.5 103.7 105.3 105.5 102.4 105.7 106.1 108.4 3.7 0.1 8.6 7.0 7.6 1.0 3.2 83.0 88.0 86.3 80.6 82.7 2.5 1.2 0.8 0.0 0.3 0.8 0.3 0.1 82.5 86.1 3.9 1.1

2.8 0.9 3.2 7.7 10.7

9.8 8.7 12.3 7.3 3.8 2.8

74.9 74.5 75.4 75.3 75.2

74.7 75.0 73.1 75.3 75.5

82.1 81.2 83.7 2.3 1.4 0.6 0.3

15.3 3.8 4.9 2.0 2.0

5.0 1.8 1.4

(continued on the next page)

82

2008 Q1 Current account balance (% of GDP) 6.5 General government gross debt (% of GDP) 27.5 CPI inflation 3.4 Core-CPI inflation 1.9 Unemployment rate 4.9 United Kingdom GDP (y-o-y growth) 2.7 General government final consumption expenditure (y-o-y growth) 0.5 General government final consumption expenditure (% of GDP) 21.3 Household final consumption expenditure (y-o-y growth) 1.9 Household final consumption expenditure (% of GDP) 60.6 Gross investment (y-o-y growth) 6.5 Gross investment (% of GDP) 18.6 Gross fixed investment (y-o-y growth) 4.2 Gross fixed investment (% of GDP) 18.0 Changes in inventories ( y-o-y growth) Changes in inventories (% of GDP) 0.5 Exports of goods and services (y-o-y growth) 3.1 Exports of goods and services (% of GDP) 28.1 Imports of goods and services (y-o-y growth) 1.4 Imports of goods and services (% of GDP) 31.0 Current account balance (US$ billion) 1.2 2.8 29.8 30.3 30.7 30.2 28.9 1.0 1.2 0.5 1.6 1.6 1.0 0.5 2.4 1.7 1.5 3.1 0.4 4.6 6.1 5.5 2.1 6.3 6.9 7.9 10.3 3.6 Q2 Q3 Q4 Q1

2009 Q2 Q3 Q4 Q1

2010 Q2 Q3 Q4

ICRA BULLETIN
2011 2012 Q1

Money
Q2 Q3 0.1 0.5 1.4

Q4

Q1

Q2

5.7 5.5 7.3 3.4 3.6

2.9 3.2 2.4 2.4 1.1 0.7

0.5 2.3 1.6 0.1

&
1.1

Finance
0.5 0.2 1.5 0.2 14.7 1.7 0.6 14.8 1.9 0.6

35.7 32.4 38.7 3.1 3.3 1.6 1.3 1.1 0.2 2.1 0.2 44.2 51.2

59.5 59.5 1.6 1.2 11.9 62.3 2.6 1.8 12.5 65.1 2.8 2.3 12.8 78.3 2.4 2.9 13.0 1.7 1.3 11.9

84.4 78.4 2.1 2.8 13.5 88.4 1.2 1.9 13.7 1.8 0.9 1.2 2.1 0.5 1.2 0.9 1.8 1.2 0.3 2.4 1.6

103.9 SEPTEMBER.2012 92.5 100.4 102.3 104.5 108.2 1.2 0.6 1.8 14.5 0.8 0.9 14.2 1.3 0.2 0.1 0.2 14.5 14.3 14.7 0.8 1.5 1.4 0.5 0.2 0.9 0.6 0.3 22.4 22.7 22.5 22.3 22.2 1.2 22.4 23.0 0.3 1.2 3.0 0.5 0.6 0.2 0.8

2.4 13.7

3.9 5.4 3.3 0.8 0.6 23.4 22.7 23.2 23.4 23.6 23.3 23.1

21.9 21.7 21.8

22.8 22.9 22.6 1.3 0.1 0.2 2.4 61.7 61.4 6.4 14.0 61.2 9.3 15.2 61.9 5.5 14.5 61.6 17.8 15.7 3.5 8.7 14.6 2.3 15.2 3.0 14.9 14.5 15.0 14.8 14.2 5.4 3.4 2.5 61.9 7.6 14.9 61.8 2.6 14.1 10.1 15.1 1.7 1.0 0.1

1.6 0.4 2.6 5.1 4.5

3.0 4.5 2.8

1.3 1.8 61.7 61.7 61.3 0.7 3.8 14.9 15.1 15.9 1.4 0.0 2.0 14.2 14.3 14.2 736.6 1.3

1.6

0.9

60.8 60.4 61.4 60.8 61.8 6.0 17.1 17.9 16.6 15.3 14.3

61.4 61.3 61.1 17.2 13.8 18.5 14.2 14.5

61.9 0.4 14.5

61.9 0.6 14.5

2.8 12.2 20.9 27.3 23.0

4.5 0.7 16.9 16.8 16.2 16.0 15.6

13.5 10.6 14.6 14.9 14.8

8.1 13.4 18.3 16.4

0.9 14.2

1.9 14.7

13.6

189.3 15.8 98.1

125.7 90.2

81.6 145.5 69.5 211.8 323.7 129.6 319.8 0.3 0.3 0.7 1.3 0.8 0.3 0.8

192.3 122.1 215.4 2902.9 137.5 121.3 237.8 0.2 0.6 0.7 6.4 0.1 0.2 0.7 4.5 7.2 7.9 10.2 2.8 32.5 31.6 32.4 32.2 32.4 0.6 8.7 4.3 0.5 1.3 34.1 33.8 33.4 34.0 34.4 46.5 7.0 18.1 11.4 17.5 34.4 34.3 1.2 0.7 33.0 32.2 2.6 2.4 1.0 1.6 0.2 0.4

0.6

0.1

0.1

8.2 9.1 11.3 9.0 3.2 2.6 7.8

28.9 28.4 28.6 29.5 29.4

30.5 30.7 30.4 8.0 4.6 4.1 8.3 10.7

1.8 2.2 3.5

10.9 7.1 13.2 14.2 11.7

32.1 32.8 33.1 31.5 30.6

30.3 30.2 29.7 30.7 31.5

32.7 32.6 32.8

26.4 9.3 7.3 8.2

27.7 6.4 16.1 3.5 1.1

57.6 14.9 12.6 14.5 15.7 10.1

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83

ICRA BULLETIN

2008 Q1 Q2 Q3 Q4 Q1

2009 Q2 Q3 Q4 Q1

2010 Q2 Q3 Q4 Q1

2011 Q2 Q3 Q4

2012 Q1 Q2

Current account balance (% of GDP) General government gross debt (% of GDP) CPI inflation 2.4 Core-CPI inflation 1.2 Unemployment rate 5.1 Japan GDP (y-o-y growth) 1.3 General government final consumption expenditure (y-o-y growth) 1.3 General government final consumption expenditure (% of GDP) 18.3 Household final consumption expenditure (y-o-y growth) 0.7 Household final consumption expenditure (% of GDP) 56.6 Gross investment (y-o-y growth) 0.0 Gross investment (% of GDP) 23.9 Gross fixed investment (y-o-y growth) 2.8 Gross fixed investment (% of GDP) 22.5 Exports of goods and services (y-o-y growth) 10.7 Exports of goods and services (% of GDP) 18.2 Imports of goods and services (y-o-y growth) 3.0 Imports of goods and services (% of GDP) 17.0 Current account balance (US$ billion) 58.1 Current account balance (% of GDP) 4.8 CPI inflation 1.0 Unemployment rate 3.9

Money

&

1.0 0.2 1.3 1.1 1.5 1.3 3.0

1.3 0.6 64.0 54.8 3.9 1.6 6.3 58.6 3.0 1.5 7.0 61.9 2.1 1.7 1.5 7.6 7.7 5.5 4.8 9.2 6.5 5.5 2.3 0.8 0.2 2.1 19.9 19.1 19.9 19.7 20.1 0.8 2.2 3.8 0.8 0.7 58.8 57.5 2.6 24.2 58.8 5.3 22.3 58.8 4.0 21.0 59.0 3.6 3.5 20.9 20.3 20.1 20.5 1.8 1.3 58.7 58.4 2.0 3.7 20.0 19.8 3.4 3.4 1.8 0.6 4.9 7.8 7.7 7.9 1.7 2.1 2.8 65.8 2.2 1.5 2.1 3.3 69.6 73.2 0.2 2.7

2.5 2.3 2.5 2.7 1.7

1.9 1.1 3.0 83.4 79.6 3.4 2.6 7.8 80.1 4.1 3.0 7.7 83.3 84.4 4.5 3.1 4.4 3.0 7.9 0.7 5.3 3.3 0.1 1.7 0.6 1.9 2.0 1.8 2.7 1.7 20.7 19.8 20.5 20.9 20.6 0.1 2.7 1.5 0.6 0.3 59.0 57.9 2.8 21.4 58.4 0.2 21.0 59.3 59.0 0.1 4.0 0.3 0.2 21.2 21.1 21.2 0.7 2.8 1.3 20.0 0.1 20.4 0.4 0.7 20.7 20.7 20.5 0.1 13.5 6.4 5.5 1.2 2.4 1.0 8.7 21.2 20.8 21.2 3.7 3.9 4.9 21.6 21.5 21.7 0.6 3.6 3.1 59.4 59.5 59.4 0.3 0.8 3.7 3.3 20.6 20.6 20.5 1.6 1.6 2.1 2.0 0.5 2.7 3.6 4.7 3.0 2.5 3.0 8.0 7.7 8.2 8.3 8.2 2.9 2.3 2.1 4.7 3.5 2.9 85.7 1.9 2.9

Finance

47.9 43.9 45.6 3.4 1.5 5.3 47.4 3.6 4.8 1.6 2.0 5.6 5.8 1.1 0.1 0.7 0.2 0.6 0.5

76.7 75.8 3.4 2.7 2.8 7.8 7.8 4.5 4.5 2.1 2.9 19.8 19.8 19.8 2.6 2.3 58.0 57.9 2.5 21.1 21.0 21.3 0.0 7.0 20.2 4.5 20.1 0.3 20.1 20.1 20.2 57.7 2.6 78.3 3.3

SEPTEMBER.2012

18.6 18.4 18.6

0.9 1.1 0.8

57.2 56.7 1.3 24.4 57.9 1.5 23.7 1.3 24.1

4.4 3.7 22.5 2.9 22.8 1.8 5.9 22.4 21.8 22.0

10.3 8.2 10.7 11.5 20.7 12.0 20.8 20.4

23.7 23.2 12.7 15.1 11.1 12.2 13.3 14.1 14.8 4.8 35.4

25.2 30.4 21.3

3.9 13.2 37.1 29.6

17.7 18.3 19.3 0.4 1.6 0.3

15.2 15.5 15.2 15.2 15.6

15.2 14.9 15.6 5.9 10.7 9.3 3.4 16.1 14.3 15.5 16.2 16.4 119.6 54.5 42.4 23.1 32.5 2.0 3.7 3.7 0.1 5.0 3.0 0.0 4.7 1.6 0.3 4.6 2.2 0.1 0.4 4.5 5.0 4.4 4.4 4.6 0.3 0.5 0.1 1.4 1.2 21.7 18.7 16.4 16.7 16.9 5.1 5.9 6.6 8.4 14.8 15.1 15.3

15.8 0.4 17.2 18.0 14.0 13.9 12.4 15.9 12.1 11.7 12.7 12.9 13.5 5.5

11.2 16.1 12.3

17.6 17.8 19.5

14.0 14.2 14.0

161.2 44.5 34.0 3.3 3.7 1.4 3.9 3.0 1.4 2.2 4.0 4.0 4.1 4.6 1.0 0.1 2.0 1.9 25.0 23.8

146.8 38.5 39.3 2.9 3.2 1.3 1.0 5.1 2.2 5.1 5.4 5.2 5.1 2.0 1.2 3.1 3.5 4.1 45.9 53.6

203.8 45.0 51.6 3.7 3.4 0.7 0.9 5.1 0.8 5.1

84

(continued on the next page)

2008 Q1 China GDP (y-o-y growth) 10.6 Index of industrial production 17.8 Current account balance (US$ billion) 400.7 Current account balance (% of GDP) Budget balance (% of GDP) 0.5 CPI inflation 8.3 Unemployment rate Brazil GDP (y-o-y growth) 6.3 General government final consumption expenditure (y-o-y growth) 4.3 General government final consumption expenditure (% of GDP) 20.0 Household final consumption expenditure (y-o-y growth) 6.4 Household final consumption expenditure (% of GDP) 58.9 Gross fixed investment (y-o-y growth) 15.7 Gross fixed investment (% of GDP) 18.3 Exports of goods and services (y-o-y growth) 0.9 Exports of goods and services (% of GDP) 12.2 Imports of goods and services (y-o-y growth) 14.5 Imports of goods and services (% of GDP) 12.1 Current account balance (US$ billion) 10.3 Current account balance (% of GDP) 2.5 India GDP (y-o-y growth) 8.9 7.1 6.3 6.9 2.4 3.9 1.4 12.8 22.2 12.8 5.6 17.0 19.0 58.4 6.1 20.0 1.7 6.5 3.1 5.0 20.2 19.9 5.7 7.5 58.9 57.8 13.7 18.5 19.1 19.7 0.6 3.5 13.6 13.6 15.5 19.3 13.5 13.2 15.7 12.4 16.1 12.5 19.4 17.1 60.6 61.7 2.7 1.8 20.8 21.5 1.6 3.5 5.2 7.1 0.9 2.4 7.1 9.0 0.4 6.9 0.3 0.4 5.9 7.1 1.2 1.2 0.1 3.7 7.2 426.1 16.0 10.1 9.1 9.0 13.9 16.0 5.7 8.3 6.8 6.1 Q2 Q3 Q4 Q1

2009 Q2 Q3 Q4 Q1

2010 Q2 Q3 Q4

ICRA BULLETIN
2011 2012 Q1

Money
Q2 Q3 9.3 9.5 14.1 9.1 15.1 13.8

Q4

Q1

Q2

8.4 7.9 12.9 10.7 13.9 18.5 8.3 1218.7 364.4 5.8 3.8 4.3 1.7 0.3 2.4 1.5 3.1 2.3 21.2 21.2 21.1 4.4 3.8 61.1 61.9 61.0 6.6 3.6 13.1 13.2 17.5 9.3 18.0 18.3 9.1 5.8 12.2 10.1 10.2 11.0 11.6 10.3 9.7 10.5 3.9 14.0 19.2 19.3 9.3 29.9 60.0 59.8 4.6 7.5 8.3 21.0 21.2 0.4 6.4 3.3 5.3 9.1 3.4 0.8 10.2 3.8 1.9 2.9 1.6 0.5 284.4 4.7 8.9 10.7 11.9

10.3 10.3 13.7 9.3 12.2 13.3 13.5 14.8 9.8 9.7

&
4.0

Finance
8.9 8.1 12.8 11.9

7.6

SEPTEMBER.2012

9.5

282.2 289.1 316.3 331.1 298.7 5.0 4.9 5.6 2.5 2.6 2.9 9.6 7.6 8.8 4.2 5.5 5.1 21.1 21.3 21.2 7.0 6.3 6.0 59.6 59.8 59.3 22.2 27.5 19.6 20.3 19.5 19.5 11.6 7.2 12.1 10.9 11.0 10.8 36.5 11.2 11.2 13.0 3.6 19.4 19.5 11.0 8.6 59.6 59.7 7.2 5.9 21.0 20.6 3.1 2.1 7.1 5.3 4.1 2.2 2.4 3.6 4.6 5.4 2.2 1.7 5.5 4.1 4.0

303.2 259.3 201.7 196.4 1.8 2.1 1.8 5.6 6.4 2.7 3.3 2.2 2.0 2.8 1.3 1.5 3.3 2.8 1.4 0.7 0.5 6.1 4.5 3.6 4.1 2.2 4.1 6.1 1.6 2.1 2.3 2.9 2.1 2.3

20.7 20.5 20.7 4.1 5.6 3.0 2.0 2.4 2.4 20.9 21.0

60.3 59.8 60.5 4.9 6.2 2.8 1.9 19.2 2.2 3.7 18.7 19.3 19.3 19.1 4.5 6.8 4.2 3.4 5.9 2.1 61.4 61.1

11.9 11.7 11.9 10.2 25.7 13.8 14.7 5.9 6.2 6.6 1.5 12.8 11.9

7.7 6.1 13.5 12.9 11.4 7.1 41.3 38.6

40.3 11.9

11.2 11.2 10.5 10.6 11.5 12.1

12.6 11.8 12.0 12.4 12.8 52.5 13.4 13.3

12.1

28.2 6.6 6.0 1.7 1.3 1.6 1.5 5.3 4.9

24.3 2.2 4.9 12.2 1.4 0.6 1.1 6.8 6.5 7.6 9.2 12.6 2.5 2.4

47.3

11.9 11.9 11.5 11.9 14.8 11.3 10.6 15.8 12.1 2.2 2.3 2.1 9.2 8.7 7.8 7.8 6.2 9.0 2.0 2.4 2.1 1.7 1.7 7.1 6.9 6.2 5.6 2.7 2.0

(continued on the next page)

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2008 Q1 Q2 Q3 Q4 Q1

2009 Q2 Q3 Q4 Q1

2010 Q2 Q3 Q4 Q1

2011 Q2 Q3 Q4

2012 Q1 Q2

General government final consumption expenditure (y-o-y growth) General government final consump tion expenditure (% of GDP)

Money

&

18.1 20.9 1.6 2.0 11.0 12.3 9.7 8.4 9.3 10.0 7.8 57.5 53.3 58.1 1.1 35.3 57.5 1.2 11.0 0.5 36.0 38.2 37.0 4.7 11.6 4.1 32.0 5.2 32.2 33.2 33.4 18.3 6.0 29.5 28.9 24.0 21.1 25.9 26.6 32.4 24.6 34.0 46.1 29.6 25.7 30.0 34.0 28.5 23.7 24.7 6.9 22.3 21.0 8.8 30.2 32.6 2.0 0.6 33.7 35.6 5.8 5.2 60.9 56.9 6.7 6.6 8.7 13.3 12.1 50.9 2.8

16.4 21.3 37.5 12.0 11.2 11.1 7.4 7.3 58.9 59.4 6.1 35.3 35.0 36.4 2.0 0.4 30.7 30.0 31.1 8.9 4.7 11.8 14.2 20.2 20.6 20.4 7.7 8.4 16.1 24.9 24.8 25.5 25.7 24.3 27.2 0.6 21.1 17.2 18.9 19.6 21.2 4.9 10.6 12.8 29.2 32.7 30.7 0.3 8.7 19.2 15.3 34.3 37.3 36.7 59.2 5.8 7.1 15.2 25.3 17.8 60.1 53.2 58.1 8.5 7.0 6.6 8.7 13.5 11.8 11.4 9.6 6.2 5.6

3.8 0.9 11.9 11.2 8.3 10.4 57.1 59.0 17.9 15.7 36.8 38.1 15.5 14.7 31.3 32.0 17.8 14.8 21.4 21.5 16.8 16.7 26.4 28.0 26.1 26.6 12.2 15.8 23.1 24.7 33.1 35.4 29.8 29.4 12.9 3.2 35.1 34.0 12.9 0.9 58.3 51.7 7.5 5.2 13.0 11.7 2.5 13.6

7.6 4.9 11.6 11.0 11.0 5.3 4.9 55.9 55.8 57.8 4.4 13.6 35.8 37.9 37.6 4.0 14.7 29.8 31.2 30.9 19.8 18.0 19.7 23.8 23.0 24.2 22.3 19.3 27.0 30.2 29.5 32.9 61.9 5.4 17.4 18.9 20.2 21.8 3.4 2.2 1.1 3.8 4.2 8.9 9.2 9.0 8.9 9.2 8.4 7.2 4.4 4.5 31.8 25.8 27.0 2.0 23.1 27.8 6.1 18.1 27.8 28.6 5.0 0.3 3.6 33.6 33.7 5.1 0.1 3.6 58.5 52.5 4.6 6.4 6.1 12.8 11.8 7.2 4.7 4.1

Finance

SEPTEMBER.2012
Household final consumption expenditure (y-o-y growth) Household final consumption expenditure (% of GDP) Gross investment (y-o-y growth) Gross investment (% of GDP) Gross fixed investment (y-o-y growth) Gross fixed investment (% of GDP) Exports of goods and services (y-o-y growth) Exports of goods and services (% of GDP) Imports of goods and services (y-o-y growth) Imports of goods and services (% of GDP) Current account balance (US$ billion)

31.0 3.4 3.4 12.3 11.9 2.5 1.0 1.1 4.0 8.3 6.3 7.8 9.0 10.2 9.4 4.0 0.1 0.4

25.9 4.2 9.2 12.2 1.9 1.4 3.0 10.8 8.9 11.8 13.3 15.3 3.3 3.1

51.7 12.8 12.1 16.8 10.0 3.2 3.1 4.3 12.1 13.7 10.3

Current account balance (% of GDP) CPI Inflation

Source : The Economist (http://www.economist.com); Main Economic IndicatorsComplete Database, OECD library (http://www.oecd-ilibrary.org); Federal Reserve Economic Data (http://research.stlouisfed.org/fred2/); Central Statistics Office, Government of India (mospi.nic.in); Reserve Bank of India Database (http://www.rbi.org.in); Rate Inflation (http://www.rateinflation.com); Eurostat Database (http://epp.eurostat.ec.europa.eu); OECD Stat Extracts (http://stats.oecd.org).

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References
De Long, J. Bradford, and Lawrence H. Summers (2012), Fiscal Policy in a Depressed Economy, Conference on the Brookings Papers on Economic Activity, March. Feldstein, Martin (2007), Remarks, Jackson Hole Symposium on Housing, Housing Finance and Monetary Policy (Sponsored by the Federal Reserve Bank of Kansas City), August 31-September 1. Fisher, Irving (1933), The Debt-Deflation Theory of Great Depressions, Econometrica, Vol. I, No. 4. G20 (2008), Declaration of the Summit on Financial Markets and the World Economy, Washington DC, November 15, www.g20.utoronto.ca. (2009), Declaration of the Summit on Strengthening the Financial System, London, April 2, www.g20.utoronto.ca. IMF (2007), Global Financial Stability Report, Washington DC, International Monetary Fund, April. (2007a), Global Financial Stability Report, Washington DC, International Monetary Fund, October. (2009), The State of Public Finances Cross-Country Fiscal Monitor, November, 2009. (2012) September 2011 World Economic Outlook Database, accessed in April 2012. (2012 a), World Economic Outlook Update, April. Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, Macmillan, London. Phelps, Edmund S. (1972), Inflation Policy and Unemployment Theory, W.W. Norton, New York. Rakshit, Mihir (2005), Budget Deficit: Sustainability, Solvency and Optimality, in A. Bagchi (ed.), Readings in Public Finance, Oxford University Press, New Delhi. (2007), Inflation in a Developing Economy: Theory and Policy, Money & Finance, September; reprinted in Mihir Rakshit, Macroeconomics of PostReform India, Oxford University Press, 2009, New Delhi. (2008), The Subprime Crisis: A Primer, Money & Finance, May. (2009), The IMF on the Global Crisis and Its Resolution, Development and Change, Vol 40, No. 6. (2010), Global Downturn and Cross-Border Trade: Some Theoretical and Policy Perspectives, Economic and Political Weekly, May 1. (2011), Inflation and Relative Prices in India 200610: Some Analytical and Policy Issues, Economic and Political Weekly, April 16. Shiller, Robert J. (2007), Understanding Recent Trends in House Prices and Home Ownership, Jackson Hole Symposium on Housing, Housing Finance and Monetary Policy (Sponsored by the Federal Reserve Bank of Kansas City), August 31-September 1, 2007.

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