1、Important disclosures appear at the back of this document Global Viewpoint Issue No: 10/04 March 10, 2010 Goldman Sachs Global Economics, Commodities and Strategy Research at https:/ Fiscal Differentiation in FX Markets The impact of fiscal policy on FX markets is a thorny issue. While important in
2、theory, practical issues make the comparison of the fiscal stance between two countries almost impossible. Moreover, fiscal stimulus and a rising debt-related risk premium typically affect currencies in opposite ways. We create a Fiscal FX Slice and a Debt FX Slice and show that expansionary fiscal
3、policy in general supports a stronger currency. The link between debt levels and FX is more complex and seems to depend more on sustainability concerns, the expectation of fiscal contraction and the risk of monetisation of government debt. We apply this framework to the UK and discuss the fiscal imp
4、act for a number of countries globally. Lastly, we have revised some forecasts in peripheral Europe. 1. Introduction While the potential impact of fiscal policy on exchange rates is large, according to economic theory, in practice the issue is often neglected. One of the key problems is that compari
5、sons of fiscal policy across countries are very difficult due to transmission lags, uncertain multiplier effects and the wide variety of potential measures, ranging from tax cuts over public investment, to income support schemes. Cross-country comparisons of fiscal parameters are very often an exerc
6、ise in comparing apples with pears. Moreover, fiscal stimulus and a rising debt-related risk premium typically affect currencies in opposite ways. While fiscal stimulus should boost demand and support a currency, unsustainable debt levels are likely to lead to rising risk premium, i.e., currency dep
7、reciation. And with shifting market emphasis through time, either factor may dominate. We tried to find a broad proxy to disentangle these issues. And, as we will explain in more detail below, there is relatively strong evidence that fiscal policy dominates as a key issue, and that larger deficits t
8、ypically lead to stronger currencies. This is illustrated in the chart, which shows the total return of a dynamic long-short FX basket (FX Current), composed of large deficit countries on the long side and small deficit ones on the short side. A similar analysis for debt levels does not show any cle
9、ar trend. This result may surprise many given the current market focus on debt levels, as we will discuss in more detail below. Thomas Stolper +44 (0)20 7774 5183 Themistoklis M. Fiotakis +44 (0)20 7552 2901 Fiona Lake +852 2978-6088 Mark Tan +1 (212) 357 7621 Swarnali Ahmed +44 (0)20 7051 4009
10、 9010011012013014015016017098 99 00 00 01 02 02 03 04 04 05 06 06 07 08 08 09Over Time, The Market Has Exhibited A Clear Preference For High Deficit CurrenciesFiscal balance currentSource: Goldman Sachs.high deficit currencies outperform渐飞研究报告 - http:/Issue No: 10/04 2 Global Viewpoint Goldman Sachs
11、 Global Economics, Commodities and Strategy Research March 10, 2010 2. The FX-Fiscal Policy Nexus and the Financial Crisis Since the beginning of the crisis, fiscal policy has remained at the forefront of macroeconomic discussions. Most recently, the turmoil surrounding Greek debt highlighted the is
12、sues of debt sustainability and fiscal coordination in the Euro-zone. But the issue spread further, leading to fears of possible contagion in global credit markets and the banking sector. Most recently, the focus appears to have shifted to the UK, where uncertainty about the forthcoming election out
13、come amplifies the concerns about fiscal policy. The experience of the last couple of months appears to suggest that large budget deficits translate into concerns of debt sustainability. Currencies seem to react to these concerns with a higher risk premium. Recent EUR and GBP weakness both highlight
14、 this issue. However, it is important to remind readers that fiscal expansion has not always been discussed with negative connotations. Throughout the crisis, expansionary fiscal policies were viewed in a different light. Early on in the crisis, for example, the prospect of a collapse in global dema
15、nd created a broader need for government support on two levels: first, fiscal spending geared towards stabilising the financial system and, second, a level of fiscal spending to reinvigorate the economy and support growth. Tax cuts, measures of extended income support and subsidies such as car scrap
16、page schemes all attempted to boost aggregate demand. A series of G20 meetings took place explicitly to encourage global leaders to boost fiscal support for the ailing economies. Discussions for coordinated fiscal stimulus boosted risky assets and, given the prevailing correlations, weakened the Dol
17、lar and supported pro-cyclical currencies. Currencies with more expansionary policies also tended to outperform. Even the Dollar has strengthened since December, partly in response to a fiscal growth boost. 3. Growth as Primary Fiscal-FX Transmission Channel A good starting point to analyse the impa
18、ct of fiscal policy is through the impact on growth, or the output gap. Last year we discussed in some theoretical detail how stronger demand growth leads to a narrowing output and higher resource utilisation in a country. If other countries experience less demand growthor even no demand growth at a
19、llrelative prices typically change to help re-allocate productive capacity across countries. Typically this means real appreciation. Using this same framework helps assess the impact of fiscal policy. Assessing the impact of fiscal policy on FX poses considerable challenges, which means the issue is
20、 often neglected. These challenges can broadly be split into at least six major categories, as highlighted in bold below. The first three are uncertainty about the transmission channel, about the timing of the impact, and about the exact quantitative measurement of fiscal policy and debt levels. Fis
21、cal policy can be implemented in a multitude of ways, with significant potential variations in the fiscal multiplier, from direct and indirect taxes, via subsidies and government investment, to public-sector employment and government consumption. Each of these individual measures will be subject to
22、transmission, timing and quantitative uncertainty. The next layer of uncertainty is the question of which level of government is responsible for the implementation of fiscal policy. Here the spectrum goes from central or federal governments on one side, to regional and state levels administrations (
23、even municipalities play an important role), as well as transfers between the different levels of government. In terms of debt dynamics, it is critical to know if fiscal measures are of a temporary or permanent nature, as the latter will have more negative implications for longer-term sustainability
24、. Fiscal policy has to be differentiated along the axis of discretionary versus automatic. Fiscal stabilisers tend to increase budget deficits during recessions and automatically consolidate the budget during periods of stronger growtha mechanism which discretionary spending lacks. Lastly, to compli
25、cate the analysis of these issues even further for FX market participants, all these potential issues have to be assessed in a differential form, comparing at least two countries. Given the challenges, there is little market consensus about the impact of fiscal policy on FX markets. Why is it so dif
26、ficult to compare fiscal policies across countries? 020406080100120140160180200012345672005 2007 2009Index% GDPMarkets Have Started to Worry About Fiscal Sustainability Recently Despite Years of Fiscal DeficitsWorld Govt Bal (LHS)SOVX Western Europe* (RHS)*Prior to series start in 2009, average of 1
27、6 constituent countries .Source: GS Global ECS Research, Bloomberg.渐飞研究报告 - http:/Issue No: 10/04 3 Global Viewpoint Goldman Sachs Global Economics, Commodities and Strategy Research March 10, 2010 If, for example, fiscal policy boosts demand more in one country than in another, we would expect more
28、 inflation (or less disinflation) in the faster growing country, nominal exchange rate appreciation and fewer exports as more products are consumed locally. A standard open economy model (such as Mundell-Fleming) would also predict that rising imports would satisfy rising relatively stronger demand
29、at home. The central bank plays an important role in this set-up, as rising interest rates in response to the inflationary pressures help attract capital, which in turn leads to an immediate FX appreciation. The mechanics work similarly in reverse. A country with fiscal contraction will have a wider
30、 output gap, more spare capacity, disinflation, falling interest rates, capital outflows and a weaker nominal exchange rate. An improving trade balance would then help support demand from the external side to use part of the excess capacity. From an analytical perspective, we have been illustrating
31、this standard IS-LM type framework with 4 quadrants, as shown in the chart above. Easy fiscal policy, for example, can lead to a very strong currency at times of monetary tightening, while tight fiscal and easy monetary policy typically coincides with a weak currency. More difficult to assess is the
32、 likely direction of the currency in the two remaining quadrants. Easy fiscal policy and the related increase in aggregate demand, combined with easy monetary policy, could result in more inflationary pressures. This in turn would imply real appreciation pressure mostly coming from rising prices, wh
33、ile nominal appreciation potentially remains muted. Very high inflation rates could even lead to nominal depreciation. Finally, tight fiscal policy and high interest rates may lead to nominal appreciation in response to high carry but deflation, as weak external demand and fiscal contraction lead to
34、 ample spare capacity. As highlighted in the box on the previous page, trying to quantify the theoretical notion of expansionary fiscal policy faces considerable practical obstacles. All the issues relating to lags, measurements and cross-country comparisons apply. 4. Debt as Primary Fiscal-FX Trans
35、mission Channel Beyond the transmission channel via growth, the second key issue is the question of debt sustainability. A very high level of government debt that raises concerns about the governments ability to pay its liabilities back may lead to a form of capital flight. Holders of government deb
36、t decide they may find safer investments in other countries. As a result, yields would rise to reflect the increased default risk and the currency would likely depreciate. Concerns about debt sustainability are therefore transmitted into FX markets via a risk premium. In other words, any factor that
37、 triggers the re-assessment of debt sustainability can lead to an almost instantaneous change in the exchange rate. Moreover, when a country has hit the sustainability constraint, immediate fiscal contraction is often the result. And, given the growth-related transmission channel discussed above, ch
38、ances are the fiscal consolidation would lead to less demand and hence a depreciating currency. So the rise in a debt-related risk premium in the currency can also be seen as the rational reflection of inevitable and fully anticipated fiscal contraction. The market reaction to the worrisome UK debt
39、trajectory is a good example highlighted by Ben Broadbent and Kevin Daly in the latest issue of the UK Economics Analyst. The US, Japan and parts of the Euro-zone face similar issues. The problem with debt sustainability is that it depends on long-term projections of growth, demographics, tax revenu
40、es or the future value of government assets, etc. Even a small change in the assumption of growth rates, for example, can lead to substantial changes in the long-term sustainability assessment. Maybe the most interesting and least predictable combination is one of rapid fiscal expansion, which could
41、 lead to unsustainable debt levels. In this scenario there are two offsetting forces at work: current fiscal stimulus likely boosts demand and, at the margin, leads to a strong currency. But the expectation of inevitable fiscal Fiscal PolicyTight EasyTight Indeterminate Strong currencyEasyWeak curre
42、ncy IndeterminateSource: Goldman Sachs.MonetaryPolicyThe FX Impact of Fiscal Policy under different monetary policy regimes2030405060708075 80 85 90 95 00 05 10 15% of GDPSource: ONS, GS CalculationsUK Net Public-Sector Debt Continues to ClimbFcast渐飞研究报告 - http:/Issue No: 10/04 4 Global Viewpoint Go
43、ldman Sachs Global Economics, Commodities and Strategy Research March 10, 2010 consolidation in the near term suggests a rising risk premium is needed and fiscal policy will likely switch rather suddenly from expansion to contraction. The two offsetting forces have the potential to create very diffi
44、cult and choppy conditions for the currency of that country. And there could be some non-linearity involved as well. Beyond a certain debt level, the likelihood of imminent fiscal contraction may rise disproportionately. The most traumatic transmission channel from debt to FX would likely be straigh
45、t monetisation of government debt, which would typically lead to very high levels of inflation and related nominal depreciation. While market participants have been discussing such a hyperinflation scenario over the last two years, we do not think it is likely as long as central banks remain indepen
46、dent. This transmission channel should not be an issue for the countries we cover. 5. Constructing Two Fiscal FX Currents On a broad market basis, the theoretical discussion above raises two simple questions. How does the FX market typically view wide fiscal deficits? And, under what circumstances d
47、oes it change its focus? A direct assessment is virtually impossible given the myriad of measurement and other issues highlighted above. We attempted to assess how strongly FX markets focus on fiscal issues by conducting a search of news stories. Interestingly, budget deficit and debt issues are bas
48、ically always an issue, and the frequency of related quotes remains broadly steady through time. One could therefore conclude that the conceptual importance is recognised but the quantitative assessment of fiscal policy on FX remains the blind spot. To gain a more quantitative sense of the impact, w
49、e ran a simple exercise. We created two related FX Currents. To remind readers, FX Currents are long-short total return indices of currency baskets. The basket components are based on dynamically ranked macro characteristics. For a number of Slices, such as Growth, Carry or Valuation, a fully tradable variant is called an FX Current. In this particular case we created two new indices, which rank currencies according to their annual
