An assessment of the risks to the medium-term outlook of the Belgian international economic environment [ Working Paper 12-03 - 12/09/2003]

The baseline scenario for the international economic environment used by the fpb is a consensus projection, and it does not include an assessment of the risks that may affect the international economy. This paper presents simulations with the nime model that may help to evaluate the effects of four risks that were perceived to weigh on the international economic environment scenario during the preparation of the latest medium-term outlook for the Belgian economy. These four risks are a temporary world-wide autonomous drop in private consumption, a further monetary easing by the European Central Bank (ecb), a fiscal consolidation in the euro area, and a sustained world-wide stock market fall.

The structure of this paper is as follows. In the second section, we give a brief overview of the nime model. The nime model is a macro-econometric world model that divides the world into five different country blocks, and that can be used to study the transmission of the effects of exogenous shocks on the Belgian international economic environment. In the third section, we simulate the effects of an autonomous drop in private consumption across the different country blocks. This drop is calibrated in such a way that it induces a one percentage point increase in the savings rate of the household sector in each of the country blocks. In the fourth section, we simulate the effects of the case that the ecb delays its monetary tightening, assumed in the baseline scenario, by one year. In the fifth section, we simulate the effects of a fiscal consolidation, whereby we assume that there is an additional cut in the public expenditures of the euro area, in such a way that it induces ex ante a one percentage point reduction in the fiscal deficit to gdp ratio. In the sixth section, we assess how the world-wide stock market correction in 2002 tempered world-wide growth and inflation. In the last section we give a brief summary of the results.

Before we proceed, we want to make the following three remarks. First, in the following sections we focus mainly on the macro-economic effects in the euro area, because this is the main trading partner of Belgium. The simulation results for the other country blocks can be found in Appendix B of this working paper. Second, we want to emphasise that the simulations of this paper are of an illustrative nature, and they should not be considered as predictions. Third, interpreting the simulations of this paper, it should be remembered that the nime model is a Keynesian model with classical long run properties. In the long run, the economy is at its natural equilibrium, whereby the relative prices clear the markets and the nominal variables do not affect equilibrium in the real sector. However, in the medium run, the model has typical Keynesian features, whereby prices adjust sluggishly to their equilibrium value, supply is determined by demand, and expectations have some backward looking features.