The Economist has devised a composite measure of interest rates, deficits and debt which are mechanism that tend to be used by a country’s policymakers to cope with a recession.
They assign a value of 100 which is maximum wriggling room – that is interest rates that are 10% or above. A value of 0 means there is no room to drop interest rates i.e. interest rate are 0%.
They assign a value of 100 to those countries that have budget surplus of 5% of GDP or above. A value of 0 is given to deficits of 15% of GDP or more.
They assign 100 to a country that, in the IMF’s view, can borrow a further 250% of GDP or more and 0 to those, including Greece, Italy and Japan, that it judges to be testing markets’ faith.
The chart below shows how countries rank. Norway, South Korea and Australia are top and have all kept their interest well clear of 0% and have very low debt levels. On average the rich world’s wriggle room has fallen by about a third since 2007. The leeway of hard-pressed countries such as Italy and Spain has shrunk by nearly half.