Economic Planning in the Presence of Natural Disasters. by Associate Professor Mehmet Ulubasoglu

Transcription

1 Economic Planning in the Presence of Natural Disasters by Associate Professor Mehmet Ulubasoglu Date: 1 February 211

2 Scope of Presentation Problem Identification Economic Model as the Workhorse of Economic Planning Integrating Natural Disaster Shocks into the Economic Model Results and Policy Simulation Analysis Conclusion and Recommendations

3 One Model: Many Names Econometric Model; Macroeconometric Model; Structural Model; Economic Model

4 Feature of a Good Economic Model Be simple in construction but realistic in forecasting; Cover the whole economy which can be displayed with a simple diagram; be consistent with economic logic; able to utilize enough data (i.e., historical information)

5 Objectives of Constructing an Economic Model Covering the basic linkages in the economy Forecasting the impact of shocks Assessing scenario outcomes Policy-making

6 Generic Steps in working with an Economic Model Step 1: Locating a Suitable Model Step 2: Analyzing the Feasibility of the Model Step 3: Establishing a Baseline Forecast Step 4: Preparing the Policy Change to be Analyzed Step 5: Running the Policy Scenario Step 6: Assessing the Results

7 Economic Planning with Economic Model

8 An Economic Model 1. Selection of Key Elements

9 Economic Model 2. Assumptions: How the Blocks are Linked

10 Economic Model 3. Hypothesis Some Examples of Hypothesis Monetary policy is more effective than fiscal policy. Exchange rate policy is more effective than monetary policy. Fiscal policy is more effective than monetary policy. Monetary along with exchange rate policy is more effective than fiscal policy.

11 Economic Model 3. Hypothesis Monetary policy Interest rate Fiscal policy Government expenditure Exchange rate policy Trade sector

12 Methodology: Integration of Natural Disasters into Economic Planning

13 Natural Disasters and Economic Model 4. Inputs of the Model: Estimation of Damages due to Natural Disasters From Risk Assessment to Pre-disaster Loss Estimation From Damage Assessment to Post-disaster Loss Estimation

14 Natural Disasters and Economic Model 2. Assumptions: How the Blocks are Linked

15 Natural Disasters and Economic Model 5. Outputs of the Model: Policy Analysis Natural Disaster Shocks: Production Block; Bop Block; Govt. Sector Block; Monetary Block; Price Block; and Exchange Rate Block Available Policy Options: 1. Fiscal Policy given no natural disasters; 2. Fiscal Policy given natural disaster shocks; 3. Monetary Policy given no natural disasters; 4. Monetary Policy given natural disaster shocks; 5. Fiscal and Monetary Policy given no natural disasters; 6. Fiscal and Monetary Policy given natural disaster shocks;

16 Natural Disasters and Economic Model 3. Hypothesis Revised: Some Examples of Hypothesis Monetary policy is more effective than fiscal/exchange rate policies for recovering total damages due to natural disasters. Exchange rate policy is more effective than fiscal/monetary policies for recovering total damages due to natural disasters. Fiscal policy is more effective than monetary/exchange rate policies for recovering total damages due to natural disasters. Monetary along with Exchange rate policy is more effective than fiscal policy for recovering totaldamagesdue to naturaldisasters.

17 Natural Disasters and Economic Model 3. Hypothesis Monetary Policy Interest Rate Fiscal Policy Government Expenditure Natural Disaster Shocks Production Block

18 Policy Simulations Expansionary Fiscal Policy Simulation: REDUCE THE TAXES All production sectors are worse off Without Fiscal Shock With Fiscal Shock at 2% VAGR (Baseline) VMAN (Baseline) VSER (Baseline) GDP (Baseline) VAGR (total_govt_exp) VMAN (total_govt_exp) VSER (total_govt_exp) GDP (total_govt_exp) Figure: Hypothetical Effects of Fiscal Shock on Production Sectors of the Economy

19 Expansionary Fiscal Policy Simulation: WITH TAXES REDUCED Total Government Revenue Government Budget Deficit Government 7 14 revenue and 6 12 budget deficit have grown up; REVT (Baseline) REVT (total_govt_exp) GBD (Baseline) GBD (total_govt_exp) Money Supply M (Baseline) M (total_govt_exp) Volume of Imports MV (Baseline) MV (total_govt_exp) Government budget deficit expands money supply followed by an increase in foreign price level that leads to a decrease in imports ;

20 Dynamic Policy Simulations 2. Expansionary Monetary Policy Simulation: REDUCE THE INTEREST RATE All production sectors are worse off Without Monetary Policy With Interest Rate Reduced by 5% VAGR (Baseline) VMAN (Baseline) VSER (Baseline) GDP (Baseline) VAGR (interest_rate) VMAN (interest_rate) VSER (interest_rate) GDP (interest_rate) Figure 9.5: Effects of Monetary Policy on Production Sectors of the Economy

21 Expansionary Monetary Policy Simulation A decrease in interest rate has ended up with an increase in money supply An expansionary monetary policy has also speeded up the government budget deficit Money Supply Government Budget Deficit M (Baseline) M (interest_rate) GBD (Baseline) GBD (interest_rate)

22 4. Fiscal & Monetary Policy Mix Without Fiscal & Monetary Policy Mix With Fiscal & Monetary Policy Mix All production sectors are worse off; Agriculture is the most victim; VAGR (Baseline) VMAN (Baseline) VSER (Baseline) GDP (Baseline) VAGR (fiscal_monetary) VMAN (fiscal_monetary) VSER (fiscal_monetary) GDP (fiscal_monetary) Total Government Revenue REVT (Baseline) REVT (fiscal_monetary) Government Budget Deficit GBD (Baseline) GBD (fiscal_monetary) Total government revenue has been stronger continuously; Government budget deficit widens; However, GBD increases due to an increase in govt. expenditures;

23 Natural Disaster Shock as Input into Economic Model Sector Total Effects (in dollars) Damage Fraction of Capital Damaged Primary Sectors: Agriculture ** 1% Secondary Sectors: Industry ** 2% Service Sectors: Transport & Communications ** 8% Commerce ** 22% Housing ** 4% Tourism ** 35% Electricity ** 17% Education ** 2% Health ** 3% Water and Sanitation ** 7% Public Administration ** 6% Cultural Heritage ** 14% Total *** ***

24 Potential Impact of Natural Disasters on GDP Source: Chhibber & Laajaj, 27

25 Methodology: At a Glance INPUTS ECONOMIC MODEL OUTPUTS Damage Data from Risk Assessment Damage Data from ECLAC Methodology Estimation of Loss Selection of Optimum Policy Option Damage Data: Hypothetical Case

26 Q & A Session

27 Thank You