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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