Patrick Blagrave, Giang Ho, Ksenia Koloskova, and Mr. Esteban Vesperoni
Are fiscal spillovers today as large as they were during the global financial crisis? How do they depend on economic and policy conditions? This note informs the debate on the cross-border impact of fiscal policy on economic activity, shedding light on the magnitude and the factors affecting transmission, such as the fiscal instruments used, cyclical positions, monetary policy conditions, and exchange rate regimes. The note assesses spillovers from five major advanced economies (France, Germany, Japan, United Kingdom, United States) on 55 advanced and emerging market economies that represent 85 percent of global output, looking at government-spending and tax revenue shocks during expansion and consolidation episodes. It finds that fiscal spillovers are economically significant in the presence of slack and/or accommodative monetary policy—and considerably smaller otherwise, which suggests that spillovers are large when domestic multipliers are also large. It also finds that spillovers from government-spending shocks are larger and more persistent than those from tax shocks and that transmission may be stronger among countries with fixed exchange rates. The evidence suggests that although spillovers from fiscal policies in the current environment may not be as large as they were during the crisis, they may still be important under certain economic circumstances.
Mr. Jesus R Gonzalez-Garcia, Mr. Ermal Hitaj, Mr. Montfort Mlachila, Arina Viseth, and Mustafa Yenice
Amid rapid population growth, migration in sub-Saharan Africa has been increasing briskly over the last 20 years. Up to the 1990s, the stock of migrants—citizens of one country living in another country—was dominated by intraregional migration, but over the last 15 years, migration outside the region has picked up sharply. In the coming decades, sub-Saharan African migration will be shaped by an ongoing demographic transition involving an enlargement of the working-age population, and migration outside the region, in particular to advanced economies, is set to continue expanding. This note explores the main drivers of sub-Saharan African migration, focusing on migration outside the region, as this has greater global spillovers. It finds that the economic impact of migration for the region occurs mainly through two channels. First, the migration of young and educated workers—brain drain—takes a toll as human capital is already scarce in the region, although some recent studies suggest that migration may have also a positive effect—brain gain. Second, remittances represent an important source of foreign exchange and income in a number of sub-Saharan African countries, contribute to the alleviation of poverty, and help smooth business cycles.
Francisco Arizala, Mr. Matthieu Bellon, Ms. Margaux MacDonald, Mr. Montfort Mlachila, and Mustafa Yenice
After close to two decades of strong economic activity, overall growth in sub-Saharan Africa decelerated markedly in 2015–16 as the largest economies experienced negative or flat growth. Regional growth started recovering in 2017, but the question remains of how trends in the economies stuck in low gear will spill over to the countries that have maintained robust growth. This note illuminates the discussion by identifying growth spillover channels. The focus is on trade, banking, financial, remittance, investment, fiscal, and security channels, which are the most prominent and most likely to transmit growth trends across borders. In addition to bringing together findings from a broad array of existing research, the note identifies countries that are the most likely sources of regional spillovers and those that are most likely to be impacted, and provides estimates for the size of these channels. It finds that intraregional trade and remittance flows are an important channel for growth spillovers, while banking channels are less important but will remain a risk going forward. Finally, the note documents other important spillover channels through financial markets contagion, revenue-sharing arrangements in fiscal unions, commodity-pricing policies, corporate investment, and forced migration. The main takeaway is that the level of interdependence among sub-Saharan countries is higher than is generally assumed. Consequently, there is a need for additional emphasis on regional surveillance and spillover analysis, along with traditional bilateral surveillance.
Mr. Julian T Chow, Ms. Florence Jaumotte, Mr. Seok G Park, and Ms. Yuanyan S Zhang
The recent strong, sustained appreciation of the U.S. dollar raises questions about possible financial spillover effects for emerging markets and developing countries. This report finds that, unlike past episodes, emerging markets’ vulnerability has improved along a number of dimensions, though some risks persist (as identified in this report).
Ara Stepanyan, Agustin Roitman, Gohar Minasyan, Ms. Dragana Ostojic, and Mr. Natan P. Epstein
In the face of sharply lower oil prices and geopolitical tensions and sanctions, economic activity in Russia decelerated in late 2014, resulting in negative spillovers on Commonwealth of Independent States (CIS) and, to a lesser extent, on Baltic countries. The spillovers to eastern Europe have been limited. The degree of impact is commensurate with the level of these countries’ trade, remittances, and foreign direct investment (FDI) links with Russia. So far, policy action by the affected countries has focused on mitigating the immediate consequences of spillovers.
Miss Nkunde Mwase, Mr. Papa M N'Diaye, Ms. Hiroko Oura, Mr. Franto Ricka, Katsiaryna Svirydzenka, and Ms. Yuanyan S Zhang
Although China’s much-needed transition to a new growth path is proceeding broadly as expected, the transition is still fraught with uncertainty, including regarding the Chinese authorities’ ability to achieve a smooth rebalancing of growth and the extent of the attendant slowdown in activity. Thus, in the short run, the transition process is likely to entail significant spillovers through trade and commodities, and possibly financial channels. This note sheds some light on the size and nature of financial spillovers from China by looking at the impact of developments in China on global financial markets, with a particular emphasis on differentiation across asset classes and markets. The note shows that economic and financial developments in China have a significant impact on global financial markets, but these effects reflect primarily the central role the country plays in goods trade and commodity markets, rather than China’s financial integration in global markets and the direct financial linkages it has with other countries.
This note analyzes the impact of preannounced government spending shocks in the United States on the real effective exchange rate and the trade balance. Using a vector autoregression framework that allows anticipated fiscal shocks to be identified using survey information, we find that preannounced spending shocks lead to a sizable real effective dollar appreciation and a worsening of both the aggregate trade balance and bilateral trade balances in a panel of partner countries. The results are robust to controlling for country-specific variables like the macroeconomic and policy conditions in the recipient countries, are generalized across regions and might have decreased during the zero-interest-lower-bound regime.
Using a panel vector autoregression and a novel measure of export-intensity-adjusted final demand, this note studies spillovers from China’s economic transition on export growth in 46 advanced and emerging market economies. The analysis suggests that a 1 percentage point shock to China’s final demand growth reduces the average country’s export growth by 0.1–0.2 percentage point. The impact is largest in Emerging Asia, where an export-growth-accounting exercise suggests that China’s economic transition has reduced average export growth rates by 1 percentage point since early 2014. Other countries linked to China’s manufacturing sector, as well as commodity exporters, are also significantly affected. This suggests that trading partners need to adjust to an environment of weaker external demand as China completes its transition to a more sustainable growth model.