International Economy Report: Post-Recession Productivity and Interest

This report delves into two critical aspects of the international economy: the reasons for low productivity growth in industrialized nations since the Great Recession of 2007-2009 and the impact of zero lower bounds on monetary policy. The analysis explores the factors contributing to the decline in productivity, including the bursting of the housing bubble, reduced business confidence, and the impact of recession on industrial sectors. It also examines how the zero lower bound on nominal interest rates constrains monetary policy, particularly in times of economic downturn, limiting the central bank's ability to stimulate the market. The report discusses the challenges faced by monetary authorities in implementing effective policies when interest rates approach zero, including the need for unconventional measures. This report provides a comprehensive overview of these economic challenges and their implications for the global economy.

International Economy

Table of Contents
1. Reasons for low productivity growth in the industrialized world since the great recession of
2007-2009....................................................................................................................................1
2. Impact of Zero Lower Bounds at nominal interest rates on monetary policy.........................2
REFERENCE...................................................................................................................................5

1. Reasons for low productivity growth in the industrialized world since the great recession of
2007-2009
Recession is a business cycle contraction when there is as general slowdown in economic
activity. It is a significant decline in the economic activity that goes on for more then few
months. It is visible in industrial production, employment, real income and wholesale-retail
trade. In technical terms recession is two consecutive quarters of negative economic growth as
measured by a company's gross domestic product. The great recession which officially lasted
from December 2007 to June 2009, began with the bursting of an 8 trillion dollar housing
bubble. Irrational exuberance in the housing market led many people to buy houses they could
not afford. This causes loss of money by selling the house for less than their mortgage. An
escalating foreclosure rate panicked many banks and hedge funds. A recession has a domino
effect, where increased unemployment leads to less growth and a drop in consumer spending,
affecting businesses, which lay off workers due to losses (Great Recession, 2017).
In the period of recession whole economy gets shattered and this leads to affect every
aspect in a negative manner. As low level of income is their in the hands of general public this is
because of reduction in the pay scale due to depressed economy. Low level of employment and
no new job opportunities in the economy leads to unemployment and general public gets
shattered. As it is seen that at the time of recession availability of funds, jobs, income is at their
lowest and general public gets affected. Recession last for some months and years but the effect
it puts on economy is very harsh in long run. As the great recession of 2007 to 2009 has lasted
but it has effects economy in such a manner that development of the country has gone slow and
low rate of GDP in the country. The growth of labour productivity and total factor productivity
declined sharply in countries experiencing a market reduction in the great recession. Labour
productivity is the amount of goods and services produced with the number of labour hours used
in producing those goods and services (Gilman, 2015).
As sales and revenue starts declining in the period of recession which leads to decline in
profits. In that time manufacturers are not interested in expanding any money on new products
and which leads to a stop in the economy development. When no new goods and services will be
manufactured and no more resources are purchased or sold this gives a economy a moderate line
on which it operates and no growth is recorded. Effect of recession was very high on industrial
sector as they gets affected because of non availability of buyers in the business due to low
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income. As productivity is a measure of the efficiency with which a country combines capital
and labour to produce more with the same level of factor inputs. It is seen that productivity
growth has been slow in the industrialization since recession because of no more new production
of goods. Employment rate is zero at the point of time and huge amount of losses are suffered by
large and small business organisation (Golub, 2013). Effect of recession on the economy can be
for a short duration of time or can be long term. This productivity growth rate become slower is
long term impact of recession as availability of resources in the business is not as much as
required to give hike to production. Using same level of technology gives no improvement in the
production and on continuous basis productivity of the business is affected. Their are mainly two
reasons recorded for reduction in the productivity growth of the country. One is the amount of
innovation taking place in the economy may be temporarily reduced, due to loss of business
confidence. As businesses consider it highly risky to invest more funds due to high amount of
uncertainty. The second reason of low productivity is the channel through which the recession
could have negatively impacted growth is externality associated with the expansion of output
itself. Considering all the information available in the economy it can be seen that recession
affects all the factors that may impact any business negatively and this leads in creation of hurdle
for growth of the country. A low productivity gives result in over utilisation of resources because
productivity can not be enhanced with employing more resources and in long run overall growth
of the economy of the country gets affected (Hart and Spero, 2013).
2. Impact of Zero Lower Bounds at nominal interest rates on monetary policy
Zero lower bound is a macro economic problem and it arises when short term nominal
interest rate is at or near zero. Economy of the country was performing well and some amount of
interest is offered by the government to the depositors of money. This scenario has changed
when the great recession of 2007 to 2009 hit the economy of the country. As prior to recession
rate of inflation was low and close to official targeted rates. When recession puts impact on the
economy central banks responded to the large fall in demand and the under utilisation of
resources by adjusting key policy interest rates. This means at the time of recession the nominal
rate of holding cash was zero or lower then that. At point of recession central bank of a country
will prefer to lower the interest rate even more to stabilize the economy but can not do so
because interest rate can not go lower beyond zero. Interest rate lower then zero will trigger
account holders to withdraw their money from commercial banks and to hold the cash. The Zero
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lower bound limits the central bank to stimulate the market in dire conditions (Ko and Lee,
2015).
Rate of inflation is low and unemployment is too high, response to this situation is by
pushing down short-term interest rates to boost spendings. When the rate of interest reaches zero
the monetary easing becomes difficult and may require unconventional monetary policy such as
large scale assets purchase. Before recession of 2008, Zero lower bond on short term interest
rates become constant on monetary policy. Zero lower bonds on nominal interest is a constraint
for monetary policy. Nominal interest rate refers to the interest rate before taking inflation into
account. The federal funds rates, the interest rate set by the federal reserve can be referred to as a
nominal rate. In monetary policies at zero lower bound the federal reserve should prepare for
possibility that interest rates will hit zero again in future. Monetary policies are introduced in the
economy so that financial system of the country can be managed in most efficient manner. As
growth of a nation is highly depended on the monetary system because all other sectors in the
economy are connected with this. When interest rate is provided to general public at zero and
effect of inflation is not included in this then results of this can not be certain because no correct
results can be filled (Rixen and Zangl, 2013).
When interest is offered to general public then it can be seen that it will induce them to
deposit their funds with financial institutions. Offering a zero rate of interest is not an attractive
offer that is made by banks to attracts large consumers to deposit their funds in the banks. When
general public starts holding funds as cash and do not prefer it to deposit with banks then it will
create a critical situation to run that economy well. Financial institutions performs all the
functions to manage finances in the economy non availability of cash amount with banks as
deposit will reduce their liquidity to offer funds by charging interest. Monetary policies are
introduced in the economy by considering whole scenario so that any default can be removed
and situation can be settled in such a way that effective results can be grabbed. When effect of
inflation is not recorded then all the policies and planes that are introduced to manage financial
system of the country will become irrelevant. This is because reaction of implementing any
policy can be differ due to effect of inflation. Acquiring deposits from general public is one of
the primary source of arranging liquidity for banks and zero lower bound creates constant to this
source of funding. Central bank introduces monetary policies to manage the flow of funds in the
economy so that all the operations can be performed in better manner (Vernon, 2017). When
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these policies are designed a common benefit to all is given preference. But strategy of Zero
lower bound on nominal interest rates will affect the company as power of reacting is with the
public and that me results in adverse condition for implementing monetary policies for general
public (Zero Lower Bound, 2019).
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REFERENCE
Books and Journals
Gilman, N., 2015. The new international economic order: a reintroduction. Humanity: An
International Journal of Human Rights, Humanitarianism, and Development. 6(1).
pp.1-16.
Golub, P. S., 2013. From the New International Economic Order to the G20: how the ‘global
South’is restructuring world capitalism from within. Third World Quarterly. 34(6).
pp.1000-1015.
Hart, J. A. and Spero, J. E., 2013. The politics of international economic relations. Routledge.
Ko, J. H. and Lee, C. M., 2015. International economic policy uncertainty and stock prices:
Wavelet approach. Economics Letters. 134. pp.118-122.
Rixen, T. and Zangl, B., 2013. The politicization of international economic institutions in US
public debates. The Review of International Organizations. 8(3). pp.363-387.
Vernon, R., 2017. International investment and international trade in the product cycle. In
International Business (pp. 99-116). Routledge.
Online
Great Recession. 2017. [Online]. Available through:
<https://www.bls.gov/opub/btn/volume-6/below-trend-the-us-productivity-slowdown-
since-the-great-recession.htm>
Zero Lower Bound. 2019. [Online]. Available through:
<https://macroeconomicanalysis.com/macroeconomics-wikipedia/zero-lower-bound-
problem/>
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