We estimate world cycles using a new quarterly dataset of output, credit and asset prices assembled using IMF archives and covering a large set of advanced and emerging economies since 1950. World cycles, both real and financial, exist and are generally driven by US shocks. But their impact is modest for most countries. The global financial cycle is also much weaker when looking at credit rather than asset prices. We also challenge the view that syncronization has increased over time. Although this is true for prices (goods and assets), this not true for quantities (output and credit). The world business and credit cycles were as strong during Bretton Woods (1950–1972) as during the Globalization period (1984-2006). For most countries, the way their output co-moves with the rest of the world has changed little over the last 70 years. We discuss the reasons behind these new findings and their policy implications for small open economies.
Mr. Olumuyiwa S Adedeji, Mr. Sohaib Shahid, and Ling Zhu
This paper examines real and financial linkages between Saudi Arabia and other GCC countries. Growth spillovers from Saudi Arabia to Bahrain are found to be sizeable and statistically significant, but those to other GCC countries are not found to be significant. Equity market movements in Saudi Arabia are found to have significant implications for other GCC countries, while there is no evidence of co-movements in bonds markets. These findings suggest some degree of interdependence among GCC countries.
We provide a theory of the limits to monetary policy independence in open economies
arising from the interaction between capital flows and domestic collateral constraints. The
key feature of our theory is the existence of an “Expansionary Lower Bound” (ELB),
defined as an interest rate threshold below which monetary easing becomes
contractionary. The ELB can be positive, thus acting as a more stringent constraint than
the Zero Lower Bound. Furthermore, the ELB is affected by global monetary and
financial conditions, leading to novel international spillovers and crucial departures from
Mundell’s trilemma. We present two models under which the ELB may arise, the first
featuring carry-trade capital flows and the second highlighting the role of currency
Ms. Carolina Osorio Buitron and Mr. Esteban Vesperoni
Given the prospects of asynchronous monetary conditions in the United States and the euro area,
this paper analyzes spillovers among these two economies, as well as the implications of
asynchronicity for spillovers to other advanced economies and emerging markets. Through a
structural vector autoregression analysis, country-specific shocks to economic activity and
monetary conditions since the early 1990s are identified, and are used to draw implications about
spillovers. The empirical findings suggest that real and monetary conditions in the United States
and the euro area have oftentimes been asynchronous. The results also point to significant
spillovers among them, in particular since early 2014—with spillovers from the euro area to the
United States being particularly large. Against the backdrop of asynchronous conditions in these
two economies, spillovers from real and money shocks to emerging markets and non-systemic
advanced economies could be dampened.
Mr. Julio Escolano, Ms. Christina Kolerus, and Mr. Constant A Lonkeng Ngouana
This paper finds that tightening global financial conditions can worsen emerging economies’ public debt dynamics through an increasing interest rate-growth differential, particularly if coupled with high global risk aversion. Latin America and emerging Europe are the regions most likely to be adversely affected. In addition, historical evidence—analyzed by means of a Poisson count model—suggests that the frequency of sovereign debt crises increases in emerging economies at the early stage of U.S. monetary tightening cycles, at times in which the term spread also rises. The timing may be related to abrupt switches of expectations about the future course of policy in the early stages of tightening cycles.
The Great Recession underlined that policies in some countries can have profound spillovers elsewhere. Sadly, the solution of simulating large macroeconomic models to measure these spillovers has been found wanting. Typical models generate lower international correlations of output and financial asset prices than are seen in even pre-crisis data. Imposing higher financial market correlations creates more reasonable cross-country spillovers, and is likely to become the norm in policy modeling despite weak theoretical underpinnings, as is already true of sticky wages. We propose using event studies to calibrate market reactions to particular policy announcements, and report results for U.S. monetary and fiscal policy announcements in 2009 and 2010 that are plausible and event-specific.
Kotaro Ishi, Mr. Kenji Fujita, and Mr. Mark R. Stone
What is the case for adding the unconventional balance sheet policies used by major central banks since 2007 to the standard policy toolkit? The record so far suggests that the new liquidity providing policies in support of financial stability generally warrant inclusion. As the balance sheet policies aimed at macroeconomic stability were used only by a small number of highly credible central banks facing a lower bound constraint on conventional interest rate policy, they are not relevant for most central banks or states of the world. Best practices of these policies are documented in this paper.
This paper examines the comovement in emerging market bond returns and disentangles the influence of external and domestic factors. The conceptual framework, set in the context of asset allocation, allows us to describe the channels through which shocks originating in a particular emerging or mature market are transmitted across countries and markets. We show that using a simple measure of cross-country correlations together with the commonly used average correlation coefficient can be more informative during episodes of heightened market instability. Data for the period 1997-2008 are analyzed for evidence of true contagion and common external shocks.