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International Monetary Fund. Research Dept.

Abstract

When the last World Economic Outlook was published in September 2002, the global recovery was expected to continue at a moderate pace, but the risks to the outlook were seen primarily on the downside. In the event, activity in the second and third quarters of 2002—except in western Europe—proved stronger than expected; correspondingly, global GDP growth for the year as a whole is now estimated at 3 percent, 0.2 percentage point higher than earlier projected (Figure 1.1 and Table 1.1). But since then the pace of the recovery has slowed, particularly in industrial countries, amid rising uncertainties in the run-up to war in Iraq and the continued adverse effects of the fallout from the bursting of the equity market bubble. Industrial production has stagnated in the major advanced countries, accompanied by a slowdown in global trade growth; labor market conditions remain soft; and forward-looking indicators—with a few exceptions—have generally weakened (Figure 1.2). And while global fixed investment has begun to turn up, it does not yet appear strong enough to sustain the recovery if consumption growth—a key support to demand so far in the upturn together with the turn in the inventory cycle—slows.

International Monetary Fund. Research Dept.

Abstract

This chapter contains two essays on the macroeconomic and financial after effects of the bursting of an asset price bubble. This issue is topical given the large and persistent decline in equity prices since 2000 and concerns that the fallout will continue to be a drag on the recovery.

International Monetary Fund. Research Dept.

Abstract

The importance of institutions for economic development and growth has long been understood—emphasized, for example, in the writings of Adam Smith and, more recently, David Landes (1998), and recognized in the 1993 Nobel Prize awarded to Douglass North. In the past few years, however, there has been a resurgence of interest in this subject, including research into the sources of institutional differences across countries, the channels through which institutions may affect economic performance, and the quantitative importance of these links.

International Monetary Fund. Research Dept.

Abstract

The persistence of high unemployment in a number of industrial countries—notably in continental Europe—is arguably one of the most striking economic policy failures of the last two decades. A wide range of analysts and international organizations—including the European Commission, the Organization for Economic Cooperation and Development (OECD), and the International Monetary Fund (IMF)—have argued that the causes of high unemployment can be found in labor market institutions. Accordingly, countries with high unemployment have been repeatedly urged to undertake comprehensive structural reforms to reduce “labor market rigidities” such as generous unemployment insurance schemes; high employment protection, such as high firing costs; high minimum wages; noncompetitive wage-setting mechanisms; and severe tax distortions. While there are solid theoretical arguments underpinning the call for such reforms, the empirical evidence is somewhat less developed and, in some cases, unsupportive (see, for instance, Cohen, Lefranc, and Saint-Paul, 1997). This is partly because until recently the data on labor market institutions was not well enough developed to allow a full analysis of the multiple and complex linkages between labor institutions and unemployment.

International Monetary Fund. Monetary and Capital Markets Department
This Technical Note discusses the findings and recommendations made in the Financial Sector Assessment Program for Ireland in the areas of nonbank sector stability. Both nonparametric and parametric methods suggest that the residential real estate market in Ireland is close to or moderately below its equilibrium level. Two standard metrics of price-to-income and price-to-rent ratios show that following a protracted period of overvaluation prior to the crisis and a correction afterward, the market has been close to its equilibrium level in recent quarters. Households have deleveraged, but are still highly indebted. The stability analysis results also suggest that vulnerabilities among nonfinancial firms have moderated in recent years.
Mr. John C Bluedorn, Mr. Jörg Decressin, and Mr. Marco Terrones
This paper examines the usefulness of asset prices in predicting recessions in the G-7 countries. It finds that asset price drops are significantly associated with the beginning of a recession in these countries. In particular, the marginal effect of an equity/house price drop on the likelihood of a new recession can be substantial. Equity price drops are, however, larger and are more frequent than house price drops, making them on average more helpful as recession predictors. These findings are robust to the inclusion of the term-spread, uncertainty, and oil prices. Lastly, there is no evidence of significant bias resulting from the rarity of recession starts.
Mr. Marco Terrones, Mr. Ayhan Kose, and Mr. Stijn Claessens
This paper provides a comprehensive analysis of financial cycles using a large database covering 21 advanced countries over the period 1960:1-2007:4. Specifically, we analyze cycles in credit, house prices, and equity prices. We report three main results. First, financial cycles tend to be long and severe, especially those in housing and equity markets. Second, they are highly synchronized within countries, particularly credit and house price cycles. The extent of synchronization of financial cycles across countries is high as well, mainly for credit and equity cycles, and has been increasing over time. Third financial cycles accentuate each other and become magnified, especially during coincident downturns in credit and housing markets. Moreover, globally synchronized downturns tend to be associated with more prolonged and costly episodes, especially for credit and equity cycles. We discuss how these findings can guide future research on various aspects of financial market developments.
Mr. Marco Terrones, Mr. Ayhan Kose, and Mr. Stijn Claessens
This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy.
Mr. Marco Terrones, Mr. Ayhan Kose, and Mr. Stijn Claessens
We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the period 1960–2007. In particular, we analyze the implications of 122 recessions, 112 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts) and their various overlaps in these countries over the sample period. Our results indicate that interactions between macroeconomic and financial variables can play major roles in determining the severity and duration of recessions. Specifically, we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions. JEL Classification Numbers: E32; E44; E51; F42