Working Papers

Crowding-Out in a Small Open Economy (That Would Be Us!)

Tony Makin makes the case for a crowding-out effect from fiscal stimulus via the exchange rate and net exports.  Last week’s September quarter balance of payments implied a 1.8 percentage point subtraction from growth on the part of net exports, which is consistent with this story.  Indeed, despite a positive contribution in the first half of 2009, export volumes made no contribution to measured GDP growth for the year-ended in June.  A 13.1% decline in import volumes, by contrast, made a 3.3 percentage point contribution to growth over the same period. 

Remarkably, the Australian dollar-US dollar exchange rate bottomed out in October 2008, the same month as the first stimulus package, before rising 57% from its lows around 0.6000 to its recent highs around 0.9400. 

I made a similar case for crowding-out via the exchange rate and net exports in this op-ed following the May Budget.

posted on 15 December 2009 by skirchner in Economics, Financial Markets, Fiscal Policy

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Interestingly, I recently read a commentator (I cannot remember who, but it was from an American perspective, I believe) who argued that the co-ordinated global stimulus largely negated the crowding out of exports.

Personally, I don’t buy it.

But, even if it was true, at the very least the appreciation of the AUD and the negative growth in net exports implies that the relative size of the Australian fiscal stimulus has instigated crowding out.

The stimulus was too big

Posted by .(JavaScript must be enabled to view this email address)  on  12/16  at  11:17 AM

Treasury have also argued that a global fiscal expansion negates these effects (the world as a whole is a closed economy).  But as you note, Australia’s fiscal expansion was one of the largest as a share of GDP, so this still leaves us relatively exposed to crowding-out via the exchange rate and net exports.

Posted by skirchner  on  12/16  at  11:26 AM

There is an oblique reference and response to your article in today’s Australian by Alan Wood.  Here is the link:


Any comments?

Posted by .(JavaScript must be enabled to view this email address)  on  12/17  at  09:24 AM

I disagree with David Gruen (the basis for Woody’s piece) for reasons already articulated here.  I don’t think Woody was responding to me specifically.

I also disagree with this:

“there is no shortage of economists who think discretionary fiscal policy was the wrong tool to use, a dangerous revival of a discredited Keynesianism.”

You can count the number of economists willing to say this publicly on one hand.  The number who believe it privately wouldn’t be much greater.

Posted by skirchner  on  12/17  at  11:11 AM

(I am reposting an earlier message that got lost somewhere)

Just to be clear, are you disagreeing with Gruen because the crowding-out hypothesis has correctly predicted (1) higher interest rates (2) higher AUD and (3) net exports detracting from GDP?

BTW, you may be aware that on a per capita basis, GDP (trend series) has recorded five quarters of ‘negative growth.’  The seasonally adjusted series shows two quarters of decline, one no change, and two of decline again.

Posted by .(JavaScript must be enabled to view this email address)  on  12/17  at  04:44 PM

Yes, this is a standard property of open economy New Keynesian models.  I would prefer a Ricardian story from a theoretical standpoint, but the New Keynesian story seems to fit the data better.

Yes, GDP growth per capita has been negative.  As I have noted elsewhere, stronger population growth means Australia will have to grow faster to maintain growth in GDP/capita, which matters more than GDP.

Posted by skirchner  on  12/18  at  07:44 AM

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