This new outlook for the world economy is based on the Belgian Federal Planning Bureau’s NIME model and covers the period 2013-2024. The projection indicates that there should be a limited growth rebound over the period 2013-2016. Over this period, economic growth should allow a closing of the euro area’s output gap, even though world economic growth should continue to be driven mainly by countries other than those of the EU, the United States and Japan. In the longer run, world growth should decline due to a general slowdown in productivity growth, but also due to unfavourable demographic trends.
It should be noted that these 2013-2024 projections for the world economy do not serve as input for the Federal Planning Bureau’s short-term forecasts and medium-term projections for Belgium. Indeed, these latter rely on various ad hoc methodologies and integrate international forecasts from institutions such as the EU Commission, the OECD and the IMF.
Over the last couple of decades, there has been a large scale reorganisation of manufacturing production processes within global value chains. This has been achieved through fragmentation and offshoring. Fostered by the fall in coordination costs due to information and communication technology developments, offshoring implies that firms increasingly source intermediates from abroad. In developed economies, this has raised fears of massive job losses. Most academic work, in contrast, fails to find evidence that offshoring contributes to lowering employment.
Over the 1995-2004 period, the evolution of stock market indices in the United States and Europe exhibited a distinct boom-and-bust pattern, rising dramatically during the second half of the 1990s and falling sharply at the turn of the century. These changes in asset prices affected household wealth and the financing cost of investments, so that the period of rising asset prices was also characterised by strong economic growth, while the period of falling asset prices saw weaker growth. As equity markets were largely driven by "irrational exuberance" in the second half of the 1990s, it is sometimes argued that, in order to foster a more balanced growth path, the monetary authorities in the United States and the euro area should have targeted changes in a price index which not only includes contemporaneous consumer prices but also asset prices.
In this Working Paper we assess the worldwide macroeconomic implications of an interest rate rule whereby the major central banks of the world target not only changes in the traditional consumer price index but also changes in asset prices. We do this by simulating the nime model over the 1995-2004 period with an interest rate rule similar to the well-known Taylor rule, but augmented for changes in asset prices.