Wednesday, 9 October 2013

FT stumped!

The FT has been looking over some recent remarks of the IMF president Christine Lagarde and is baffled.

Christine Lagarde’s remarks show the damage done to emerging markets by a recent round of “taper talk”, over the possibility of the US Federal Reserve slowing the pace of its asset purchases and their vulnerability to future changes in the pattern of global capital flows.

“The immediate priority is to ride out the turbulence as smoothly as possible,” said Ms Lagarde. “Currencies should be allowed to depreciate. Liquidity provision can help deal with dysfunctional market behaviour. Looser monetary policy can also help.”

But she warned that countries with inflationary pressures – such as Brazil, India, Indonesia and Russia – have less scope to use monetary policy and that high debt and deficits mean many developing countries have little space for fiscal stimulus either.

The FT say they have no idea what she is talking about.  Or more precisely, certain paragraphs seem to have one implication [not enough AD in the developing world] and other paragraphs seem to flatly contradict that interpretation [too much inflation.]  Taken literally, she seems to imply that places like Brazil, India, Indonesia and Russia are in better shape than most, but the clear implication of the remarks is exactly the opposite.

Even if you prefer to talk about other topics, say capital flows, how do they impact RGDP/NGDP or AS/AD.

AD = aggregate demand
AS = aggregate supply
GDP = gross domestic product
NGDP = nominal GDP
RGDP = real GDP

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