Gross domestic product (GDP) is the total value of output (that is, all goods and services) produced within a country during a given period. GDP per capita is the average income of a citizen in a country and is often used as a measure of a country’s standard of living (Callen 2008). Coyle 2014 provides a detailed history of the concept of GDP and discusses its strengths and weaknesses. We use “output” and “GDP” interchangeably. Appendix A includes a glossary of acronyms and abbreviations used in the book.

The definition of the national business cycle goes back to the seminal study conducted by Arthur Burns and Wesley Mitchell in the 1940s. Arthur Burns served as the chairman of the U.S. Council of Economic Advisers (1953–1956), chairman of the U.S. Federal Reserve (1970–1978), and ambassador to West Germany (1981–1985, see the New York Times, 1987). Wesley Mitchell was one of the founders of the National Bureau of Economic Research—NBER (Burns 1952). The book by Burns and Mitchell Measuring Business Cycles was published in 1947 and became the seminal study describing the statistical methods of business cycle analysis employed by the NBER.

Economists have studied a wide range of real and financial factors that can drive national business cycle fluctuations: technological developments (productivity shocks), policies (shocks associated with fiscal, monetary, financial, and structural policies), movements in factors of production (labor and capital), disturbances in financial markets, fluctuations in commodity prices, political developments, news, changes in consumer confidence, and uncertainty. In a similar fashion, these same factors can play important roles in driving global business cycles because national shocks transmit across borders. We survey different branches of the literature on the global business cycles in a FOCUS box later in this chapter, the linkages between globalization and business cycle synchronization in Chapter 7, and the transmission of business cycles in Chapter 11.

Prior to the global financial crisis, there was fierce debate about whether business cycles in emerging market economies could “decouple” from advanced economies and keep global growth at a reasonable rate. This debate led to a number of studies about the growth potential of emerging market economies and their dependence on advanced economies (Kose and Prasad 2010; King 2010; Magnus 2011; Spence 2011; World Bank 2011; O’Neill 2011; Sharma 2012).

Rather than analyze the evolution and implications of the global financial crisis, we consider a broader topic here and study the global recessions and recoveries since 1960. The 2007–09 global financial crisis has been studied from different vantage points (Bosworth and Flaaen 2009; Swagel 2009; Krugman 2009a; Wessel 2010; Lewis 2010; Paulson 2011; Rajan 2011; Roubini and Mihm 2011; Sorkin 2011; Gorton 2012; Obstfeld, Cho, and Mason 2012; Blinder 2013; Bernanke 2013; Obstfeld 2013; Geithner 2014; Claessens and others 2014). Lo (2012) reviews a set of 21 books on the global financial crisis. Swagel (2013) also presents a short survey of a selected list of books on the financial crisis.

Understanding the similarities of business cycle fluctuations across countries has long been a subject of interest to macroeconomists. See Hirata, Kose, and Otrok 2013 for a review of recent studies and Zarnovitz 1992 for a survey of the earlier research program. Leamer (2009) presents a nice description of the U.S. business cycles.

Stock and Watson 2005; Canova, Ciccarelli, and Ortega 2007; Mumtaz, Simonelli, and Surico 2011; Kose, Otrok, and Whiteman 2003, 2008; and Kose, Otrok, and Prasad 2012 analyze the importance of global factors in explaining business cycles. Other studies consider the role of international business cycle linkages using a variety of approaches (Gerlach 1988; Norrbin and Schlagenhauf 1996; Gregory, Head, and Raynauld 1997; Gregory and Head 1999; Lumsdaine and Prasad 2003; Yilmaz 2010; Diebold and Yilmaz 2014).

Ambler, Cardia, and Zimmermann 2004; Imbs 2004; Bordo and Helbling 2004; Baxter and Kouparitsas 2005; and Kose, Prasad, and Terrones 2003a, 2009a document the highly correlated nature of national business cycles.

For a detailed analysis of these findings and a review of the literature on regional cycles, see Hirata, Kose, and Otrok 2013. For research on European business cycles, see de Haan, Inklaar, and Jong-A-Pin 2008. For research on the North American, Latin American, and Central American cycles, see Bergman, Bordo, and Jonung 1998; Kose, Meredith, and Towe 2005; Kose and Rebucci 2005; and Aiolfi, CatÃo, and Timmermann 2011. For research on the Asian business cycles, see Moneta and Rüffer 2009 and He and Liao 2012; and on the African cycles, see Tapsoba 2009 and Ncube, Brixiova, and Meng 2014.

We emphasize the global nature of our database since most of the earlier studies focus only on a smaller set of countries when they consider global business cycles. In fact, our study is the first to include such a large number of countries and a rich collection of variables.

A number of studies analyze the similarities and differences between the 2009 global recession and the Great Depression, such as Eichengreen and O’Rourke 2009; Romer 2009a; Helbling 2009; and Eichengreen 2015. These studies draw attention to the surprising similarities between the two episodes, especially during the early stages of the Great Recession.

The emerging market economies in our sample roughly correspond to those in the MSCI Emerging Markets Index. The main differences between our sample and that of the MSCI are that, due to the data limitations, we drop some countries, while we include other, relatively more “mature” emerging market economies since the sample starts in 1960. Emerging market economies on average had higher incomes per capita and experienced faster growth rates than other developing economies over the last two decades. In addition, the trade openness ratio for emerging market economies has risen rapidly over the past two decades (Kose and Prasad 2010).

The IMF often uses this measure of world growth in its World Economic Outlook. It is possible to consider alternative measures using different types of weighting schemes, but those generally portray qualitatively similar dynamics to the one we have here. One could also directly construct a series of world GDP (in purchasing-power-parity or market exchange rates), but it would be difficult to relate such a series to the growth rates of national GDP. Our measure is intuitively appealing because it provides a natural parallel between national and global growth.

We present the decadal averages of these weights for each country group in Appendix C. The temporal evolution of the weights shows the rising role of emerging market economies in the world economy, and this is especially pronounced for purchasing-power-parity weights. Callen 2007 explains the implications of purchasing-power-parity- and market-rates-based measures of GDP.

Bry and Boschan (1971) first introduced this method. Harding and Pagan (2002) extended it to identify the turning points in quarterly series. This dating algorithm is widely used in the cross-country context (Artis, Kontolemis, and Osborn 1997; Artis, Marcellino, and Proietti 2003; Cotis and Coppel 2005; Hall and McDermott 2007; and Claessens, Kose, and Terrones 2008a, 2009, 2012). The algorithm is also used in the analysis of cycles in credit and asset prices (Claessens, Kose, and Terrones 2008b, 2011a, 2011b; Pagan and Sossounov 2003). It is possible to employ a different algorithm, such as a Markov Switching (MS) model (Hamilton 1989), to date the turning points. Harding and Pagan (2002) compare this method with their algorithm and conclude that their algorithm is preferable because the MS model depends on the validity of the underlying statistical framework. Hamilton (2003) also presents a discussion of this issue.

Other methodologies consider how a variable fluctuates around its trend and then identify the cycles (or output gaps) as deviations from this trend. The addition of new data, however, can affect the estimated trend, and thus the identification of a cycle in these methodologies. Many studies have also documented that the features of growth cycles can depend on the detrending method used (Canova 1998). In addition, it is difficult to determine the deviation from trend (the output gap) in real time. Blanchard and Fischer (1989) explain the benefits of the Burns-Mitchell approach: “Much of the recent work has proceeded, instead, under the assumption that variables follow linear stochastic processes with constant coefficients… this has had the advantage of allowing for better integration of macroeconomic theory and econometrics. In return for this integration and for well-understood statistical properties, some of the richness of the Burns-Mitchell analysis, such as its focus on asymmetries between recession, and expansions or its notion of business cycle time (as opposed to calendar time) may well have been lost.”

We also employ this statistical method when we consider the dates of business cycles in the quarterly frequency in some of the chapters. We provide additional information on this whenever we discuss these results.

The NBER (2013) notes that its Business Cycle Dating Committee does not accept the two-quarter definition because “The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP and real GDI (gross disposable income), but use a range of other indicators as well. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, ‘a significant decline in activity.’ Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in the recessions of 2001 and 2007–2009.”

The NBER (2003) defines a recession as “a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.” The CEPR (2003) employs similar language: “a significant decline in the level of economic activity, spread across the economy of the euro area, usually visible in two or more consecutive quarters of negative growth in GDP, employment and other measures of aggregate economic activity for the euro area as a whole; and reflecting similar developments in most countries.”

The simple rule of “two consecutive quarters of decline in real GDP” at the national level follows the definition by Julius Shiskin in the New York Times in 1974 (Abberger and Nierhaus 2008). Claessens and Kose (2009) present a detailed explanation of national recessions. Blanchard (2001) briefly analyzes different types of recessions and argues that “Three types of recessions exist. The first type are those caused by major shocks, say an outbreak of war or a sudden, sharp increase in the price of petroleum. Recall that the OPEC [Organization of the Petroleum Exporting Countries] oil shocks of the 1970’s incited two world recessions. The second category of recessions arises by chance, for example when consumer confidence dips, or businesses become uneasy and cut back on investment and/or inventory. This was the cause of America’s recession in the early 1990’s. The third type of recession occurs when imbalances in an economy build up to unsustainable levels before exploding. This form of recession is sometimes characterized by vast increases in debt (corporate or consumer), or by dizzying stock market or capital asset speculations that eventually come crashing down. The ‘popping’ of such an asset bubble is what happened in Japan 10 years ago, an event from which that country has not yet recovered. Recessions of the first type are, almost by definition, largely unpredictable. Those of the second type are minor and relatively easy to repair if not to avoid. All that they usually require is a reduction in interest rates or a bit of reflation. Recessions of the third kind are the most worrying.” Lucas (2012) presents a simpler view about the sources of recessions: “I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks. But I remain convinced of the importance of financial shocks in the 1930s and the years after 2008. Of course, this means I have to renounce the view that business cycles are all alike!”

In the context of national cycles, a number of studies examine the dynamics of recoveries (Eckstein and Sinai 1986; Balke and Wynne 1995; Mussa 2009; Terrones, Scott, and Kannan 2009; Claessens, Kose, and Terrones 2012). Some define the recovery as the time it takes for output to rebound from the trough to the peak level before the recession. Others associate recovery with the growth achieved after a certain period, such as four or six quarters, following the trough (Sichel 1994).

See Rogoff, Robinson, and Bayoumi 2002 for the study. Rogoff (2002a) announced the findings of their study at the World Economic Outlook press conference.

Kose, Loungani, and Terrones (2009, 2012) extend the study by Rogoff, Robinson, and Bayoumi (2002) and provide a framework for analyzing global recessions and recoveries. Kose and Terrones (forthcoming) build on these earlier studies and summarize the main features of global recessions and recoveries.

See Claessens, Kose, and Terrones 2012.

Some have employed the definition of global recession that relied on a simple threshold over the years. For example, The Economist (2001b) noted that “there is no precise definition of ‘world recession’ (global output has risen every year since the 1930s), but it is generally taken to be growth of less than 2–2.5 percent.” There was confusion about the definition of global recession used by the IMF, as The Economist (2008a) noted: “according to the IMF’s most recent World Economic Outlook, published on October 8th, the world economy is ‘entering a major downturn’ in the face of ‘the most dangerous shock’ to rich-country financial markets since the 1930s. The Fund expects global growth, measured on the basis of purchasing power parity, to come down to 3 percent in 2009, the slowest pace since 2002 and on the verge of what it considers to be a global recession. (The IMF’s definition of global recession takes many factors into account, including the rate of population growth.)”

Those 14 years include the following episodes: 1974–75, 1980–83, 1991–93, 1998, 2001–02, and 2008–09. If one uses market weights, the list includes 1974–75, 1980–83, 1990–93, 1995, 1998, 2001–03, 2008–09, and 2011–13.

With purchasing-power-parity weights and a 1 percent threshold, the list of global recessions includes 1974–75, 1980–82, 1991–93, and 2009. With market weights and a 1 percent threshold, the list contains 1974–75, 1980–82, 1991–93, 1998, 2001–02, and 2008–09. The Economist (2008b) notes the difficulty of identifying global recessions with a single threshold tied to global GDP growth: “When tracking such diverse economies, it does make much more sense to define a global recession not as an absolute fall in GDP, but as when growth falls significantly below its potential rate. This can cause anomalies, however. Using the IMF’s definition (i.e., growth below 3 percent), the world economy has been in recession for no fewer than 11 out of 28 years. This sits oddly with the fact that America, the world’s biggest economy, has been in recession for only 38 months during that time, according to the National Bureau of Economic Research (the country’s official arbiter of recessions), which defines a recession as a decline in economic activity. It is confusing to have different definitions of recession in rich and poor economies.” It is important to note that the IMF does not have an institutional definition of global recession endorsed by its Executive Board. Although the IMF’s World Economic Outlook has occasionally studied the topic, the publication reflects the views of the IMF staff and, hence, should not be attributed to IMF executive directors or their national authorities.

In our sample, growth of world GDP was positive in all years except 2009. During the 2009 global recession, a market observer, Philip Suttle, correctly noted that “We have got the world economy contracting by just under a half percentage point, which really does not sound like very much… But it is really, really important to recognize the world economy basically never contracts. Somewhere in the world economy there is always enough [growth] to offset recessions even in the major industrial countries” (Voice of America 2009).

Blanchard (2008) argued that “it is not useful to use the word ‘recession’ when the world is growing at 3 percent. In the normal definition of things, recession is a negative number, and that is not the case. This being said, 3 percent is a very low number for world growth, and in the past, indeed, this might have been defined as on the borderline of a global recession. I think the words, ‘global downturn with still positive growth,’ are a better description of what we are facing.”

Rogoff, Robinson, and Bayoumi (2002) also concluded that a global recession took place in 1975, 1982, and 1991. Rogoff (2002a) announced the findings of their study at the World Economic Outlook press conference: “… we looked closely at the question of what constitutes a global recession, and concluded—looking at per capita output growth as well as many other variables such as world trade and industrial production—that the years 1975, 1982, and 1991 did, officially, constitute global recessions.”

According to the National Bureau of Economic Research (NBER) chronology, since 1960, the United States experienced eight recessions: 1960:Q2–1961:Q1, 1969:Q4–1970:Q4, 1973:Q4–1975:Q1, 1980:Q1–1980:Q3, 1981:Q3–1982:Q4, 1990:Q3–1991:Q1, 2001:Q1–2001:Q4, and 2007:Q4–2009:Q2.

Knoop 2004, Reinhart and Rogoff 2009, and Allen 2010 discuss the events during these episodes. For a detailed analysis of the surrounding macroeconomic and financial developments, see the IMF’s World Economic Outlook, Organisation for Economic Co-operation and Development’s (OECD’s) Global Economic Outlook, and World Bank’s Global Economic Prospects published in the years of the global recessions.

We list the countries that experienced financial crises around global recessions and downturns in Appendix D.

The 1975 episode was also compared with the Great Depression. The Economist (1974b) noted that “As in 1929, collapses have come first in precisely the sectors where it was thought during the boom that it was easiest for any idiot to become a millionaire. In early 1972, it would have been thought ridiculous to say that bankruptcy would hit first at beef barons, property speculators, stockbrokers, whizz-kids’ new sorts of banks. But stock market crashes have now already gone further than those in 1929. Property prices have collapsed, transmitting strain to the financial system through the fringe banks and towards banks within the fringe… Paradoxically the most important difference produced the greatest similarity. Inflation is doing to the world economy of 1970s what falling prices did in the 1930s—causing unemployment and company failures… One big difference between 1929 is that this slump has been signaled well in advance, and still a real crash has not come… Remember that in 1929 the federal government’s purchases of goods and services amounted to a tiny 1.25 percent of America’s (gross national product), so that a big Keynesian fiscal restimulation was not easy then. But in a slump accompanied by huge price inflation big fiscal restimulation is not going to be easy either.”

During the stagflation era of the 1970s, debates raged about the likelihood of a deep recession. As it is now, “depression” was a sensitive term then and led to a humorous search to replace it with an attractive alternative, as described by Time (1978): “Maverick Economist Alfred Kahn has a penchant for candor that is both refreshing and dangerous in Washington. When he said that there is the possibility of a ‘deep, deep depression’ if inflation continues to soar, the President was furious. Kahn responded by purging the word depression from his vocabulary and instead using ‘banana.’ So he now says: ‘We’re in danger of having the worst banana in 45 years.’” Kahn was an economist who worked in the Carter Administration as chairman of the Civil Aeronautics Board and chairman of the Council on Wage and Price Stability (Lang 2010). Golden (1975) and Shabecoff (1975) discuss whether the 1975 episode was a recession or a depression. Mullaney (1977) documents the debates about the weak recovery following the 1975 global recession.

Hamilton (2009a) claims that oil prices increased prior to all global recessions, including the latest. Hamilton (2009b) examines the role played by oil price increases before the last recession in the United States. Blinder and Rudd (2012) present evidence that supply shocks stemming from significant movements in oil and food prices during 1973–74 and 1978–80 played important roles in driving inflation in the United States (and the recessions associated with these episodes). Barsky and Kilian (2004) and Hamilton (2011) present surveys of the history of oil shocks and the downturns that followed these shocks. Baffes and others (2015) analyze the sharp decline in oil prices over the period June 2014-January 2015 and compare the latest episode with the earlier ones.

Even before its start, media articles compared the 1982 global recession with the Great Depression: “This month sees the fiftieth anniversary of the international economic crisis of September, 1931, when the world suddenly threw away its main safeguard against long-term inflation and its principal previous weapon against short-term slump. There may not be full recovery from 1981’s slumpflation until this safeguard and weapon are in some degree reestablished, so it is awkward that most of today’s statesmen do not remember what they were” (The Economist 1981a).

In the United States, the implementation of contractionary monetary policies was led by Paul Volcker, who became the chairman of the Federal Reserve Board in August 1979 (Meltzer 2010). The Volcker disinflation reduced annual inflation from 9 percent in 1979 to 5 percent by the end of 1983. The United States experienced two consecutive recessions with large declines in output and employment during the same period (Goodfriend and King 2005). Kenen (1983) links the debt crisis to the high-interest-rate policies of the advanced economies.

Kuczynski (1982) presents a nice narrative of the events leading up to the Latin American debt crisis: “The music has stopped. In August, Mexico, the largest single recipient of Eurocurrency bank credits in recent years, announced that it could not for the time being meet its scheduled repayments of principal on the external debt of the public sector. Service on the Mexican private sector and banking system debt is sporadic or interrupted because of the shortage of foreign exchange. Argentina has in effect been unable to meet its scheduled debt service since the time of the South Atlantic conflict. And, since mid-1982, international bank lending to Latin American countries has all but ground to a halt. As a result, Brazil may find it very difficult to meet its scheduled debt service, since, like the other countries in the area, it needs a constant inflow of funds to pay off old debt.”

The following Latin American countries experienced financial crises around the 1982 global recession: Argentina, Bolivia, Brazil, Chile, Costa Rica, the Dominican Republic, Ecuador, Guyana, Honduras, Mexico, Nicaragua, Panama, Paraguay, Uruguay, and Venezuela. Dornbusch, Johnson, and Krueger 1988 and Edwards 1995 provide reviews of the Latin American debt crisis. Since many developing economies in other regions also experienced crises, some observers called this episode the Less Developed Country Debt Crisis.

In 1991, some speculated that the recession would be a milder one because of the differential growth prospects across countries. “Similarly, the so-called ‘desynchronization’ of the big economies, which has helped to prevent global recession, may now moderate the recovery. As America and Britain sank into recession last year, Japan and Germany continued to boom, helping to prop up world demand. But, as America and Britain start to recover, the former locomotives are losing steam. With growth in both Germany and Japan in 1991 likely to be barely half that in 1990, this will trim the growth in their imports from the rest of the world” (The Economist 1991). Fuerbringer (1991) discusses the implications of the U.S. recession for the global economy. The impact of the global recession was indeed felt across Europe in 1992, with a number of countries falling into recessions because of the European Exchange Rate Mechanism (ERM) crisis.

For detailed discussions of the savings and loan crisis in the United States, see FDIC 1997; Curry and Shibut 2000; and Barth, Trimbath, and Yago 2004.

Bernanke and Lown (1991) provide a careful study of the evolution of credit markets during this episode. For a discussion of the importance of household debt during this episode, see Altig, Byrne, and Samolyk 1992. Walsh 1993; Blanchard 1993; Hall 1993; and Hansen and Prescott 1993 analyze the sources of the 1990:Q3–1991:Q1 recession in the United States. Mian and Sufi (2014) analyze how the accumulation of large household debt followed by a sharp drop in household spending led to a deep global recession in 2009.

The ERM was established in 1979 by eight members of the European Economic Community (Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, Netherlands) to minimize exchange rate fluctuations within a band by fixing their exchange rates relative to one another and floating jointly against the U.S. dollar. Spain, Portugal, and the United Kingdom joined the ERM later. The ERM was designed as an intermediate step before the introduction of the euro. Higgins (1993) and Buiter, Corsetti, and Pesenti (1998) analyze the sources and implications of the ERM crisis.

Fischer, Sahay, and Végh 1996; IMF 2000; and Orlowski 2001 present detailed accounts of the many challenges the transition economies experienced in the early 1990s.

In late 1992, amid intense debate about growth forecasts, comparisons with the Great Depression were back in the headlines: “Needless to say, all this may turn out to be—like most forecasts during the past year—too optimistic. But that is still very far from saying that a depression like the one in the 1930s may be on the way. For a slowdown to become a slump, extra things need to go badly wrong—and governments can make this unlikely. Lessons from the Depression have been learnt, as the response to the global stock market crash of October 19th, 1987 showed. First and foremost, today’s central bankers understand their duties as lenders of last resort. That makes a contagious financial collapse of the sort that preceded the depression of the 1930s much less likely… Moreover, today’s governments account for a far bigger share of their countries’ national incomes than they did 60 years ago. A trend that is in many ways regrettable should console those inclined to slit their wrists just in case: these days much more of the economy is slump-proof. Thanks to the welfare state when output falls and unemployment rises, the victims (and the economy at large) are cushioned. In the 1930s, some governments raised taxes and cut public spending as the Depression grew worse. That is a mistake which is unlikely to be repeated, less because no government would try to do it than because their electorates would not let them… A third lesson from the 1930s, though familiar, demands the undivided attention of governments in the coming days and weeks: perhaps the best way to turn a recession into something far worse is to arrange an outbreak of protectionism. Off and on for months, the governments have seemed likely to do just that… If, despite everything, governments let the Uruguay round slip through their fingers, they will be helping to make the world’s worst economic nightmare come needlessly true” (The Economist 1992b).

Claessens, Kose, and Terrones (2010) and Mendoza and Terrones (2012) discuss the evolution of financial markets during the last episode.

Even in late 2008, discussions about the severity of the coming global recession started appearing in the media: “Where does that leave us today? America’s GDP may have fallen by an annualized 6 percent in the fourth quarter of 2008, but most economists dismiss the likelihood of a 1930s-style depression or a repeat of Japan in the 1990s, because policy makers are unlikely to repeat the mistakes of the past. In the Great Depression, the Fed let hundreds of banks fail and the money supply shrink by one-third, while the government tried to balance its budget by cutting spending and raising taxes. America’s monetary and fiscal easing this time has been more aggressive than Japan’s in the 1990s. However, these reassurances come from many of the same economists who said that a nationwide fall in American house prices was impossible and that financial innovation had made the financial system more resilient. Hopefully, they will be right this time. But this crisis was caused by the largest asset-price and credit bubble in history—even bigger than that in Japan in the late 1980s or America in the late 1920s. Policymakers will not make the same mistakes as in the 1930s, but they may make new ones (The Economist 2008b).

Many articles documented the spread of the recession in early 2009: “Manufacturing deteriorated around the world in December, signaling a worsening global recession… The euro-area’s gauge fell to a record low, while industry in China contracted for a fifth month. Indicators for the U.K., Sweden, Hong Kong and Australia also showed factories in decline. The ISM’s (Institute of Supply Management’s) gauge of new orders dropped to the lowest level since records began in 1948” (Chandra 2009).

The latest episode was also compared with the Great Depression, and a number of similarities were documented, especially for the early stages of these two episodes. For example, Eichengreen and O’Rourke (2009) note that “the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929–30.” For an extended discussion of similarities and differences between the episodes, see Almunia and others 2010 and Bordo 2012b. For more information on the Great Depression, see Temin 1991 and Eichengreen 1996. Solomou (1998) discusses economic cycles since 1870 and lists many studies on various aspects of the Great Depression.

Rowen (1974) nicely articulates this observation in the Washington Post: “In the immediate future, the policy makers will have to be worrying not about demand and how to sustain it or moderate it, but also shortages of supply. It is much more difficult to shape policies that deal with a recession produced not because people fail to buy goods—but because the factories cannot get enough fuel to keep things going.”

Lucas and Sargent (1978) provide a perceptive critique of Keynesian economics in light of the events of the 1970s and explain the fundamentals of the “rational expectations revolution” in macroeconomics that became influential during the late 1970s. Miller (1994) presents a rich list of essays that describe the origins and growth of this revolution. Romer and Romer (2002) and Sargent (2002) examine the evolution of stabilization policies over the past 50 years. Federal Reserve Bank of Kansas City 2002 provides a set of insightful papers on the design, objectives, and implications of fiscal and monetary policies. Blanchard (2009a) presents a brief summary of the major changes in macroeconomics during the 1970s.

Rotemberg (2013) notes that the 1960s and 1970s were often called the “Great Inflation” period because of the Federal Reserve’s inflation tolerance. He argues that this period ended with the famous Volcker disinflation of 1979–1982. The period that followed, 1982–2007, was a period of inflation intolerance.

Economists extensively debated the sources of the decline in the volatility of macroeconomic fluctuations in a number of advanced economies (Blanchard and Simon 2001; Ahmed, Levin, and Wilson 2004; Bernanke 2004; Davis and Kahn 2008).

There has been vigorous debate over the past seven years about macroeconomists’ inability to predict the global financial crisis and develop the necessary policy measures to mitigate its adverse effects. Krugman (2009b) criticizes the macroeconomics literature for its failure to recognize the strong linkages between the financial sector and the real economy: “During the golden years, financial economists came to believe that markets were inherently stable—indeed, that stocks and other assets were always priced just right… Meanwhile, macroeconomists were divided in their views… Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They [economists] turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets—especially financial markets—that can cause the economy’s operating system to undergo sudden, unpredictable crashes.” Cochrane (2009a) provides a critical response to Krugman’s views: “First, he [Krugman] argues for a future of economics that ‘recognizes flaws and frictions,’ and incorporates alternative assumptions about behavior, especially towards risk-taking. To which I say, ‘Hello, Paul, where have you been for the last 30 years?’… Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking… has also been doing exactly the same.” Rodrik (2015) emphasizes the importance of selecting the “correct model” to analyze the question at hand and notes that “the profession’s internal critics are wrong to claim that the discipline has gone wrong because economists have yet to reach consensus on the “correct” models (their preferred ones of course). Let us cherish economics in all its diversity – rational and behavioral, Keynesian and Classical, first-best and second-best, orthodox and heterodox – and devote our energy to becoming wiser at picking which framework to apply when.” Caballero 2010, Woodford 2010, and other papers in the fall 2010 issue of the Journal of Economic Perspectives analyze how the recent crisis may affect research on the intersection between macroeconomics and finance. Gordon 2009; Kocherlakota 2010; Turner 2012; Blanchard, Dell’Ariccia, and Mauro 2010, 2013; and Blanchard and others 2012 discuss in detail the impact of the financial crisis on the design of macroeconomic policies. Claessens and Kose (2014a, 2014b) analyze the linkages between the financial sector and real economy in light of the debates after the global financial crisis.

For extensive discussions of the similarities and differences between the last and earlier crises, see Claessens, Kose, and Terrones 2010. Blanchard 2009b; Brunnermeier 2009; Calomiris 2009; Cecchetti 2009; Reinhart and Rogoff 2008; Shin 2009; Mankiw 2012; Gourinchas and Obstfeld 2012; and Calomiris and Haber 2014 analyze the evolution of the crisis from various angles. Claessens and Kose 2014c present a synthesis of the sources and implications of various types of crisis.

Other names were also given to the latest episode: Krugman (2011a) called it the “Lesser Depression,” DeLong (2011a) the “Little Depression,” and Reinhart and Rogoff (2009) the “Second Great Contraction.”

The relatively low rate of global unemployment prior to the 1974 episode is mostly due to very low unemployment in advanced economies.

Baldwin and Evenett 2009; BussiÈre and others 2010; Henn and McDonald 2011; and Bown 2011 study various aspects of protectionist measures introduced during the 2009 global recession.

The collapse of trade (relative to output) during the global recession is puzzling, in that it was much larger than predicted by the standard business cycle models. For potential explanations of the trade collapse, see Levchenko, Lewis, and Tesar 2010; Bems, Johnson, and Yi 2010; Chor and Manova 2012; Alessandria, Kaboski, and Midrigan 2010; Amiti and Weinstein 2011; Freund 2009; and BussiÈre and others 2013. Gourinchas and Kose 2010, 2011; and Bems, Johnson, and Yi 2012 summarize these explanations.

Milesi-Ferretti and Tille (2011) and Lane (2012) study the links between declines in flows and country-specific features during the global financial crisis. Forbes and Warnock (2012) analyze the sources of large fluctuations in international financial flows.

For the evolution of global and national labor markets since the global recession, see International Labour Organization 2013, 2014.

A number of recent studies have examined the reasons for cross-country differences in the impact of the 2009 global recession (Berkmen and others 2009; Blanchard, Faruqee, and Das 2010; Lane and Milesi-Ferretti 2011; Giannone, Lenza, and Reichlin 2011; Rose and Spiegel 2011; De Gregorio 2014). Kose and Prasad (2010) provide a detailed account of these reasons and surveys the relevant literature.

Jeanne 2007; Durdu, Mendoza, and Terrones 2009; and Independent Evaluation Office of the IMF 2012 discuss the sources and implications of reserve accumulation in emerging market economies.

For a narrative of events that took place around these two downturns, see IMF 1998a, 1998b, 2001a, 2001b, 2001c; and Fischer 1998.

Some declared that all evidence pointed to a looming global recession in 1998: “Is the world headed for recession? Look at the evidence, and it’s difficult to draw any other conclusion. Asia is under water, Russia has collapsed, Latin America is shaky, and the United States and Britain look weaker than expected. When financial panic begins to spread—as it has in recent months, now hitting U.S. shocks—little can be done to stop it. The only tool available to governments is a cut in interest rates to try to stoke the economy. Central banks in the United States and Europe should be ready to take that step if things get much worse” (Journal of Commerce 1998).

In August 2001, The Economist (2001a) claimed that the global economy was already experiencing a recession: “The world economy is probably already in recession. How bad might it get? One by one, economies around the world are stumbling. By cutting interest rates again this week—for the seventh time this year—the Federal Reserve hopes it can keep America out of recession. But in an increasing number of economies, from Japan and Taiwan to Mexico and Brazil, GDP is already shrinking. Global industrial production fell at an annual rate of 6% in the first half of 2001… The picture may soon look even worse. Early estimates suggest that gross world product, as a whole, may have contracted in the second quarter, for possibly the first time in two decades. Welcome to the first global recession of the 21st century.”

See Rogoff, Robinson, and Bayoumi 2002. Rogoff (2002b) presents a nice narrative of the mood of financial market participants and policymakers in early 2002: “Amid increasing signs of recovery, there seems to be a growing denial that the global economy was ever in any real danger. Many private forecasters have stopped asking when the US economy is going to pick up and started asking when it is going to slow down. A popular refrain is that ‘it’s the recession that wasn’t.’ Europeans congratulate themselves that the eurozone only barely experienced negative growth in one quarter. Meanwhile, some in Japan still seem to believe that their country’s third recession in a decade is just a passing phase that can be forgotten as soon as US-led export growth picks up. The reality is that the sharp downturn of the past year was almost a global recession.”

It is difficult to predict the exact date of the beginning of national recessions. Mankiw (2007) notes that “The economy is teetering on the edge. Many economists, as well as online betting sites, put the risk of recession next year at about 50 percent. Once we get the final numbers, we might even learn that a recession has already begun.”

The graphs showing the behavior of the macroeconomic and financial variables during global recessions and recoveries in Figures 5.1–5.3 and Figures 6.1–6.3 emphasize the differences in the evolutions of these variables around these episodes. We focus on the period prior to recessions in Figures 5.1–5.3 and the postrecession recoveries in Figures 6.1–6.3. The year prior to the recession is the reference point in the former; in the latter, this is the global recession year.

Specifically, we study the elasticities of world consumption per capita, investment, and trade to world output by estimating a basic regression of the growth rate of each of these variables on the growth rate of world GDP per capita. We report the results of these regressions in Appendix G. Our findings with respect to trade elasticity are consistent with those in Freund 2009.

The first year of the ongoing recovery was strong, but it has since been subject to various headwinds, nicely illustrated by the evolving narrative in the IMF’s World Economic Outlook: “The global recovery is off to a stronger start than anticipated earlier but is proceeding at different speeds in the various regions” (IMF 2010a). “The two-speed recovery continues. In advanced economies, activity has moderated less than expected, but growth remains subdued… In many emerging economies, activity remains buoyant” (IMF 2011a). “The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere” (IMF 2012a). “Policy action is needed to secure the fragile global recovery” (IMF 2013a). “Global growth is still weak, its underlying dynamics are changing, and the risks to the forecast remain to the downside” (IMF 2013a). “Global activity strengthened during the second half of 2013… But downward revisions to growth forecasts in some economies highlight continued fragilities, and downside risks remain” (IMF 2014a). “Global activity has broadly strengthened and is expected to improve further in 2014–15 with much of the impetus for growth coming from advanced economies. Although downside risks have diminished overall, lower-than-expected inflation poses risks for advanced economies, there is increased financial volatility in emerging market economies, and increases in the cost of capital will likely dampen investment and weigh on growth” (IMF 2014b). “Global growth in 2014 was a modest 3.4 percent, reflecting a pickup in growth in advanced economies relative to the previous year and a slowdown in emerging market and developing economies. Medium-term prospects have become less optimistic for advanced economies, and especially for emerging markets, in which activity has been slowing since 2010. At the same time, the distribution of risks to global growth is now more balanced relative to the October 2014 WEO, but is still tilted to the downside” (IMF 2015a). “Global growth is projected at 3.3 percent in 2015, marginally lower than in 2014, with a gradual pickup in advanced economies and a slowdown in emerging market and developing economies. In 2016, growth is expected to strengthen to 3.8 percent… The distribution of risks to global economic activity is still tilted to the downside. Near-term risks include increased financial market volatility and disruptive asset price shifts, while lower potential output growth remains an important medium-term risk in both advanced and emerging market economies. Lower commodity prices also pose risks to the outlook in low-income developing economies after many years of strong growth” (IMF 2015b).

Kose, Otrok, and Prasad (2012) present a detailed account of the many differences in cyclical performance between advanced and emerging market economies over the past two decades.

For discussions of different aspects of the ongoing weak recovery, see Sachs 2008; Boskin 2009; Shiller 2009; Blanchard 2010; Calvo and Loo-Kung 2010; Wolf 2010b; Feldstein 2010; Davies 2011; DeLong 2011b; Rogoff 2011; Lagarde 2011; Samuelson 2012, 2014; and Fischer 2014.

In other words, Okun’s law, which describes an empirical relationship between GDP growth and changes in the unemployment rate, appears to hold quite well (Ball, Leigh, and Loungani 2013). Industry-by-county-level data on employment in the United States also suggest that the drop in aggregate demand (and income) driven by shocks to household balance sheets was a key factor driving the rise in unemployment during 2007–09 (Mian and Sufi 2012). The global recession had a profound impact on the U.S. labor market as it led to the highest level of long-term unemployment in the postwar period. Elsby, Hobijn, and Sahin (2010) and Elsby and Valletta (2011) describe the evolution of the U.S. labor market during the global recession. Rothstein (2012) argues that cyclical factors, such as shortfalls in aggregate demand for labor, rather than structural factors play an important role in explaining the weak performance of the U.S. labor market during the latest recovery. Daly and others (2013) document how the global financial crisis changed the relationship between unemployment and output in advanced economies. Blanchard, Jaumotte, and Loungani (2013) provide a summary of labor market policies in advanced economies during the latest global recession and recovery. Gourinchas and Kose (2013a, 2013b) provide summaries of a series of studies on the dynamics of labor markets during the global financial crisis and its aftermath. Katz and others (2014) analyze how the long-term unemployment dynamics have changed in the aftermath of the Great Recession.

Prior to both the 2009 global financial crisis and the European Exchange Rate Mechanism (ERM) crisis of the early 1990s, many advanced economies experienced highly synchronized credit booms (Mendoza and Terrones 2012).

Thirteen advanced European economies experienced recessions during this period: Austria, 1992:Q3–1993:Q1; Belgium, 1992:Q2–1993:Q; Denmark, 1992:Q3–1993:Q2; Finland, 1990:Q1–1993:Q2; France, 1992:Q1–1993:Q3; Germany, 1992:Q1–1993:Q1; Greece, 1992:Q2–1993:Q1; Italy, 1992:Q1–1993:Q3; Portugal, 1992:Q2–1993:Q3; Spain, 1992:Q1–1993:Q2; Sweden, 1990:Q1–1993:Q1; Switzerland, 1990:Q2–1991:Q2 and 1991:Q4–1993:Q1; and the United Kingdom, 1990:Q2–1991:Q3.

During the 2009 global financial crisis, 18 advanced European economies experienced recessions. Many of these economies went through double-dip recessions during 2011–13. For recent developments in the euro area business cycle, see CEPR 2012 and 2014.

See Draghi 2012.

For a summary of the human costs of recessions, see Dao and Loungani 2010; for the social costs of financial crises, see van Dijk 2013 and Otker-Robe and Podpiera 2013; and for the implications of recessions for social cohesion, see Giuliano and Spilimbergo 2009. World Bank 2010 considers the implications of the crisis for poverty reduction in developing economies. World Bank 2013 analyzes the jobs crisis triggered by the 2007–09 financial crisis.

The International Labour Organization (2013, 2014) describes the evolution of global and national labor markets since the global recession. For a discussion of the jobs crisis following the 2009 global recession, see OECD 2009, 2012a; Dao and Loungani 2010; Loungani 2012; and World Bank 2013. Atkinson, Luttrell, and Rosenblum (2013) find that because of the 2007–09 financial crisis, the U.S. economy lost at least 40 to 90 percent of its annual output. However, they also consider other cost factors and conclude that “given our range of estimates, the tepid economic recovery, and the litany of other adverse effects stemming from the Second Great Contraction, we suggest that the total domestic cost is likely greater than the equivalent of an entire year’s output.”

It is not a subject we discuss here but one can debate about the logic of having only two business cycle phases. Leamer (2008) argues that “One reason we need a clear definition is that the media focus intensely on two questions: Is it a bear market? Are we in recession? If the answer is ‘yes, we are in recession,’ it seems useful to me if both speaker and listener understand what is being said. The focus on recession is not nearly as silly as the focus on bear markets. It is only somewhat misleading to describe the economy as having two states: healthy and ill.”

For discussions about the information technology revolution, see OECD 2002, 2012b; and Byrne, Oliner, and Sichel 2013.

Recent studies examine the sources of the highly synchronized nature of national recessions during the latest global recession. Perri and Quadrini (2011) emphasize the problems in credit markets as the main source of synchronization. Bacchetta and van Wincoop 2013 argue that national business cycles can become highly synchronized when the world economy is hit by a “global panic” shock. Kamin and DeMarco (2012) and Rose and Spiegel (2010) study this issue using empirical approaches. The former study concludes that “The U.S. subprime crisis, rather than being a fundamental driver of the global crisis, may have been merely a trigger for a global bank run and for disillusionment with a risky business model that already had spread around the world.” The latter one reports that “while countries with higher income seemed to suffer worse crises, we find few clear reliable indicators in the pre-crisis data of the incidence of the Great Recession.”

Imbs (2010), using monthly industrial production data, concludes that the degree of cross-country business cycle correlations during the latest crisis was the highest over the past three decades. Dua and Banerji (2010) use a wide range of measures to analyze the degree of synchronization of recessions and report that “the 2009 global recession was possibly the most concerted in the post world war period.” Recent research indicates that shocks originating in credit markets have been influential in driving global activity during global recessions (Helbling and others 2011).

We employed the statistical method to identify the dates of the turning points of cycles in the quarterly data. The algorithm is the same as the one applied to the annual data in Chapter 3, but it requires the duration of a complete cycle and for each phase to be at least five quarters and two quarters, respectively. For details of the methodology with the quarterly data and data set of advanced economies, see Claessens, Kose, and Terrones 2012.

A number of studies examine the behavior of macroeconomic and financial variables around recessions and recoveries. For additional information on this literature, see Claessens, Kose, and Terrones 2009, 2012; and Terrones, Scott, and Kannan 2009. In related research, Diebold and Yilmaz (2009) examine “return spillovers” and “volatility spillovers” of equities during crisis and noncrisis periods.

Appendix D provides a list of countries that experienced financial crises around global recessions.

Recent studies examine the degree of synchronization of cycles using a so-called concordance index, which measures the percentage of time that two financial variables are in the same phase of their respective cycles (Claessens, Kose, and Terrones 2012). Credit and equity cycles display the highest degree of synchronization across countries. These cycles tend to be in the same phase about 80 percent of the time. Although housing is a nontradable asset, the extent of synchronization of housing cycles across countries is still high at about 60 percent (Hirata and others 2012). This partly reflects the important roles played by global factors, including world interest rates, the global business cycle, and commodity prices in explaining house price movements around the world. The degree of synchronization in housing and equity markets has increased over time, probably due to the expansion of cross-border trade and financial flows.

Bluedorn, Decressin, and Terrones (2013) provide evidence that asset price drops are significantly associated with the beginning of recessions in the Group of Seven countries.

See Forbes and Rigobon 2002. The implications of the coincidence of financial cycles have provided fertile ground for recent research. Claessens, Kose, and Terrones (2011a, 2011b) show the presence of strong interactions—between credit and housing markets, for example. Credit downturns overlapping with house price busts are longer and deeper than other credit downturns. Similarly, when credit upturns coincide with housing booms, they tend to be longer and stronger. For example, a typical credit upturn becomes 25 percent longer and 40 percent stronger when it coincides with a housing boom.

For discussions on the theoretical implications of globalization for synchronization, see Kose, Prasad, and Terrones 2003a; and Hirata, Kose, and Otrok 2013.

Beauchemin 2011; Bernanke 2012b; Council of Economic Advisers 2009, 2010, 2012; Reinhart and Rogoff 2012a, 2012b; Krugman 2012a; Bordo and Haubrich 2012; Taylor 2012; Hassett and Hubbard 2012; and Wynne 2011 provide arguments for different sides of this debate.

Reinhart and Rogoff 2009; Papell and Prodan 2011; Queralto 2013; Claessens, Kose, and Terrones 2009, 2012; and Terrones, Scott, and Kannan 2009 present detailed analyses of the implications of financial disruptions for macroeconomic outcomes during recessions and recoveries. This chapter builds on the last two studies.

Bordo and Haubrich 2012; and Howard, Martin, and Wilson 2011 argue that recessions and recoveries associated with financial disruptions are no different than other episodes. The conflicting conclusions across studies on the issue stem from differences in the definition of financial crises, the sample of countries, and the definition of recovery. There were also some speeches given by policymakers on the issue prior to the crisis. For example, Roger W. Ferguson (Vice Chairman of the Federal Reserve Board) argued that “recessions that follow swings in asset prices are not necessarily longer, deeper, and associated with a greater fall in output and investment than other recessions” in a speech he gave in January 2005 (Ferguson 2005).

Our sample includes recessions that took place during 1960:Q1–2007:Q4 (Claessens, Kose, and Terrones 2009). Recessions associated with the 15 financial crises include Australia (1990:Q2–1991:Q2), Denmark (1987:Q1–1988:Q2), Finland (1990:Q2–1993:Q2), France (1992:Q2–1993:Q3), Germany (1980:Q2–1980:Q4), Greece (1992:Q2–1993:Q1), Italy (1992:Q2–1993:Q3), Japan (1993:Q2–1993:Q4), Japan (1997:Q2–1999:Q1), New Zealand (1986:Q4–1987:Q4), Norway (1988:Q2–1988:Q4), Spain (1978:Q3–1979:Q1), Sweden (1990:Q2–1993:Q1), United Kingdom (1973:Q3–1974:Q1), and United Kingdom (1990:Q3–1991:Q3).

Recessions associated with the Big Five financial crises (identified by Reinhart and Rogoff 2009) include Finland (1990:Q2–1993:Q2), Japan (1993:Q2–1993:Q4), Norway (1988:Q2–1988:Q4), Spain (1978:Q3–1979:Q1), and Sweden (1990:Q2–1993:Q1).

Mendoza and Terrones (2012) study the likelihood of crises around credit booms. They report that the probability of having a financial crisis is more than 75 percent over the seven-year period around a credit boom. The likelihood of a financial crisis is 45 percent at the peak of a boom or after the boom. Credit booms have frequently followed financial deregulation. For example, almost all of the 15 financial crises considered here followed deregulation in the mortgage market. Claessens and others (2014) provide a wide range of studies analyzing the consequences of asset price and credit booms, busts and financial crises, and policy responses to these episodes.

Abiad and others (2009) study the medium-term output dynamics after 88 banking crises in a large number of countries. Cecchetti, Kohler, and Upper 2009; Reinhart and Reinhart 2010; Haltmaier 2012; and Furceri and Zdzienicka 2012 also document significant medium-term output losses associated with different types of financial crises. Ball (2014) estimates that the loss in potential output following the 2009 global recession ranges from almost nothing in Australia and Switzerland to more than 30 percent in Greece, Hungary, and Ireland with the weighted average loss of 23 OECD economies is 8.4 percent. IMF 2015c documents that potential output growth in advanced economies is likely to increase slightly from current rates as some crisis-related effects wear off but will likely remain below precrisis rates in the medium term.

This stylized fact is consistent with the finding that productivity is procyclical. Basu and Fernald (2000) argue that the procyclical nature of productivity is mainly explained by two forces—the variable utilization of inputs over the cycle and the reallocation of resources.

Their recent research also supports the sluggish nature of recoveries following financial crises. Reinhart and Rogoff (2014) report that, after systemic banking crises, it takes, on average, about eight years to reach the precrisis level of income; the median is about 6.5 years.

Mohammed El-Erian is a former chief executive officer and co–chief investment officer of PIMCO and Bill Gross is founder and former co–chief investment officer of PIMCO.

See El-Erian 2009, 2011; and Gross 2009. Gross (2009) claims that “we are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.” Roubini (2011) argues that “there are good reasons to believe that we are experiencing a more persistent slump.”

IMF 2013b and 2014b present these growth forecasts and an analysis of the evolutions of global real interest rates.

Summers (2013, 2014) presents the basic arguments describing secular stagnation. Summers (2013) notes that “There are many a priori reasons why the level of spending at any given set of interest rates is likely to have declined. Investment demand may have been reduced due to slower growth of the labor force and perhaps slower productivity growth. Consumption may be lower due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital. Risk aversion has risen as a consequence of the crisis and as saving—by both states and consumers—has risen. The crisis increased the costs of financial intermediation and left major debt overhangs. Declines in the cost of durable goods, especially those associated with information technology, mean that the same level of saving purchases more capital every year.” Krugman (2013c, 2014c) and Cassidy (2014) also support the notion of secular stagnation for the United States. Samuelson (2013) considers the possible causes of secular stagnation and notes that “The problem might not be a dearth of investments so much as a surplus of risk aversion. For that, candidates abound: the traumatic impact of the Great Recession on confidence; a backlash against globalization, reduced cross-border investments by multinational firms; uncertain government policies; aging societies burdened by diminishing innovation and costly welfare states. Whatever the cause, we are in unfamiliar territory.” Baily and Bosworth (2013) examine the sources of the weak recovery in the United States and conclude that “the unresolved problems suggest a long period of slow growth and higher than normal unemployment.” Bernanke (2015a, 2015b, 2015c, 2015d) states that low interest rates are not a short-term aberration, but part of a long-term trend. He notes that global trade imbalances and unequal financial flows contribute to low global interest rates. OECD 2014 argues that “a global slowdown in productivity and the risk of higher structural unemployment threaten to usher in a new era of low economic growth” (Hutchens and Martin 2014). Gordon 2012 and 2014 present a broader discussion of a growth slowdown in the United States due to a variety of structural reasons. Alvin Hansen (1939), the president of the American Economic Association, advanced the idea of “secular stagnation” in 1939. His idea was that the Great Depression could lead to a prolonged period of stagnation and high unemployment because of the decline in the birth rate and excessive savings that constrain aggregate demand (Eggertsson and Mehrotra 2014). Foster, Grim, and Haltiwanger (2014) report that during the Great Recession, the intensity of reallocation across producers fell rather than rose and the reallocation that did occur was less productivity enhancing than in prior recessions. Hamilton and others (2015) conclude that the secular stagnation hypothesis confuses a delayed recovery with chronically weak aggregate demand.

Hoshi and Kashyap (2013) study the implications of the Japanese experience during its banking crisis in the 1990s for the United States and Europe. They focus on the delay in bank recapitalization and the lack of structural reforms in Japan, arguing that these two policy choices were responsible for stagnant postcrisis growth. They conclude that “In France, Italy, and Spain bank recapitalization has been delayed and the structural reforms have been slow. Without drastic changes, they are likely to follow Japan’s path to long economic stagnation. The situation in Germany looks somewhat better mainly because the structural reform was already advanced before the crisis. Although the recovery has been slow in the U.S. as well, the problems are at least different from those faced by Japan then and many European countries now.” Buiter, Rahbari, and Seydl (2014) report that “the risk of ‘secular stagnation’ through a failure to adopt appropriate policy measures is absent in emerging markets, low in the US and UK, somewhat higher in Japan and highest in the euro area.” Another view, though, is that the global economy has enormous potential to generate a healthy dose of growth in the coming decades (see Mokyr 2014). Innovations, well-designed policies and vibrant emerging market and frontier economies can help realize that potential.

Taylor (2014b) and Rogoff (2013) present detailed arguments. George Osborne (2014), Chancellor of the Exchequer in the United Kingdom, claims that the pickup in economic growth in the United States and the United Kingdom in 2014 repudiates the secular stagnation argument. Fernald (2014) argues that it would be unreasonable to expect the U.S. productivity growth would reach its level over the 1973–95 period.

Rodrik (2013) argues that “developing countries will face stronger headwinds in the decades ahead, both because the global economy is likely to be significantly less buoyant than in recent decades and because technological changes are rendering manufacturing more capital and skill intensive.” Dervis (2013) provides an alternative view and claims that “With weak demand in advanced countries now impeding growth in emerging economies, including major players in Asia and Latin America, many are arguing that the era of income convergence has come to an end. Nothing could be further from the truth.” Spence (2014) is also optimistic about future growth in emerging market economies as he writes, “The most likely scenario is that most major emerging markets, including China, will experience a transitional growth slowdown but will not be derailed by shifts in monetary policy in the West, with high growth rates returning in the course of the coming year. There are internal and external downside risks in each country that cannot and should not be dismissed, and volatility in international capital flows is complicating the adjustment. The problem today is that the downside risks are becoming the consensus forecast. That seems to me to be misguided – and a poor basis for investment and policy decisions.”

For example, the 1975 episode led to such predictions as The Economist (1975c) notes that “Economic growth over the next 10 years will be slower than the world is accustomed to, unless politicians dare sharply to increase the rewards for risk taking. The danger ahead is (a) that the world economy will experience more violent fluctuations in demand and activity over the decade to 1985 than it experienced during the three decades to 1975; (b) that these fluctuations will be about a much slower growth trend; and that (c) the only countries that get decent growth will be those that are willing to give much higher rewards for risk-bearing—that are ready to see a substantial shift in the share of GNP away from personal consumption and government spending towards company profits. Political considerations in Britain, and some other countries, do not seem likely to favor this.” Tylecote (1992) argues that “the period of downswing—slow growth or worse—lasts some 25 years. But after about 1982, the United States and Britain led a sustained recovery among the wealthy nations of the North. The outlook seemed rosy. Those of us who never shared the optimism can now say, ‘We told you so.’ I, for one, said the world depression never went away, for the world economy also includes the poor East, and the poorer South. For them, the 1980s were a nightmare. Their foreign debts were higher than ever and the real prices of their exports lower—the latter the main cause of the rise in living standards in the North. Beggars make bad customers. Yes, for now—just as the American New Deal would have been in 1930. That is why this Long Wave downswing still has about a decade to run.” Kose and Ozturk (2014, 2015) provide a summary of some of the major changes the global economy has experienced over the past 50 years and conclude that no one could have accurately predicted these changes.

Gertler 1988; Sinai 1992, 2010; and Bernanke 1993 review some of the early literature. Claessens and Kose 2014a, 2014b broadly survey the topic. Gourinchas and Kose 2014, 2015 present summaries of recent studies analyzing the implications of various types of crises.

These frictions often stem from information asymmetries and enforcement problems (Claessens and Kose 2014b).

Aoki, Proudman, and Vlieghe 2004; and Iacoviello 2005 provide models with these features. Using a New Keynesian model, Christiano, Eichenbaum, and Trabandt (2014) find that the vast bulk of the movements in aggregate real economic activity during the recent global recession was due to financial frictions interacting with the zero lower bound.

For example, Carroll, Otsuka, and Slacalek (2006) report that the propensity to consume from a $1 increase in housing wealth ranges between 2 cents (short term) and 9 cents (long term), twice that for equity wealth. Kishor (2007) reports that while 98 percent of the change in housing wealth is permanent, only 55 percent of the change in financial wealth is. Case, Quigley, and Shiller (2013) also report that a collapse in house prices tends to be followed by a sharp decline in household spending.

For a more detailed discussion of this, see Friedman 1964, 1993.

Bloom 2009, 2013 and Baker, Bloom, and Davis 2013 provide details on the measurement of uncertainty, discuss interactions between uncertainty and activity, and present a detailed evaluation of the implications of uncertainty. Krugman 2012b and 2013b present a critical perspective on the relevance of policy uncertainty. Davis 2013 provides a response to Krugman’s criticisms. FOMC 2008, 2009; Blanchard 2009b; Summers 2009; and Romer 2009b also mention the negative impact of uncertainty on demand. Chinn 2011; Zandi 2013; and Stone 2013 analyze various aspects of policy uncertainty and their impact on activity. Lee 2014 considers the impact of uncertainty on global investment. Baker and others 2014 analyze the causes of the strong upward drift in policy-related economic uncertainty since 1960. This chapter builds on Kose and Terrones 2012 and Bloom, Kose, and Terrones 2013.

For a description of survey findings, see National Association for Business Economics 2014.

The National Association for Business Economics—NABE (2014b) reports that “A majority of the NABE Policy Survey panel feels that uncertainty about fiscal policy is holding back economic recovery, although the share that holds this opinion is smaller than that which held this view in the August 2013 survey.” Baker and others (2014) report that policy-related economic uncertainty has risen in the United States since 1960. They argue that the secular increase in policy uncertainty can be explained by two factors: growth in government spending, taxes, and regulation and a rise in political polarization and its implications for the policy-making process and policy choices.

Bloom and others (2012) document this observation.

Bachmann and Moscarini (2011) find that the direction of causality runs from recessions to uncertainty. Cesa-Bianchi, Peseran, and Rebucci (2014) also report that uncertainty is not a driver of business cycles since there is a significant impact of future output growth on current volatility (uncertainty) but exogenous changes in volatility have no effect on business cycles. Bachmann and Bayer (2013, 2014) find that the impact of uncertainty on growth is quite small in the context of general equilibrium models. In contrast, Baker and Bloom (2013) offer evidence, using disaster data as instruments, that the causality runs from uncertainty to recessions, and Bloom and others (2012) report that growth does not cause uncertainty. Predictions of theory and findings from empirical studies collectively indicate that uncertainty can play a dual role over the business cycle; that is, it can be an impulse as well as a propagation mechanism.

Bernanke (1983) and Dixit and Pindyck (1994) provide analytical models showing the impact of uncertainty on investment.

Gilchrist, Sim, and Zakrajsek (2010) and Arellano, Bai, and Kehoe (2012) provide models illustrating these interactions.

CarriÈre-Swallow and Céspedes (2013) present an empirical analysis of the impact of uncertainty in advanced economies on emerging market economies.

The growth rate of output is negatively correlated with macroeconomic uncertainty. Appendix I presents detailed results of this.

Empirical evidence based on vector autoregressive models points to a significant negative impact of uncertainty shocks on output and employment (Bloom 2009; Hirata and others 2012). These results also echo findings in a broader area of research on the negative impact of macroeconomic and policy volatility on economic growth (Ramey and Ramey 1995; Kose, Prasad, and Terrones 2005 and 2006; Fatas and Mihov 2013).

Figure 9.5 is based on the study by Baker, Bloom, and Davis 2012. Bloom and others (2012) and Baker and Bloom (2013) analyze the effects of uncertainty shocks on business cycle movements. For additional evidence on the impact of uncertainty, see Bloom 2009, 2013; and Hirata and others 2012.

Stock and Watson (2012) study the evolution of the Great Recession in the United States using a dynamic factor model. They report that many of the events during this episode were unprecedented and led to macroeconomic shocks that were larger than those previously experienced. They also find that while oil price shocks played a role in the initial slowdown, shocks stemming from financial market turbulence and heightened uncertainty were the major driving forces of the recession.

Krugman (2013a) and Romer (2013) support the use of more aggressive expansionary policies to help economic recovery and argue that continued austerity could lead to an intensification of economic malaise, as happened in 1937. For a discussion of the use of a higher inflation target, see Rogoff 2008; Blanchard, Dell’Ariccia, and Mauro 2010; and Krugman 2014b, 2014d. Some argue that monetary policy, by stopping adverse feedback loops, can play a significant role during a financial crisis (Mishkin 2009). Bernanke (2012a); English, Lopez-Salido, and Tetlow (2013); and Reifschneider, Wascher, and Wilcox (2013) take stock of the diverse monetary policy actions, conventional and unconventional, taken by the Federal Reserve since late 2007. Yellen (2013a) discusses the difficulties the Federal Reserve faced in achieving its dual mandate of price stability and maximum employment after interest rates hit the zero lower bound.

Some argue that the severity of the recent recession reflects the aggressive use of fiscal and structural policies (that is, subsidies, taxes, and regulations) implemented after 2007 as these policies reduced incentives for firms to hire and for people to work (Mulligan 2012). Similarly, others state that the weak recovery has been the result of the adverse effects of policies and regulations on growth (Ohanian, Taylor, and Wright 2012; Cogan and Taylor 2012c; Taylor 2013, 2014a).

In particular, some claim that central banks might have exercised too much policy discretion with unknown medium- to long-term implications. For instance, Meltzer (2012) notes that many of the actions taken by the Federal Reserve since late 2007 have been inappropriate for an independent central bank, as they have distorted credit markets and focused on the near term.

Kose, Loungani, and Terrones (2013a) document how policies diverged during the latest global recovery and compare their paths with the average behavior of policies during previous episodes.

Other indicators, such as the ratio of government deficits to GDP and short-term real interest rates, often lead to noisy signals about the stance of policies over the business cycle (Kaminsky, Reinhart, and Végh 2005).

For a discussion of fiscal policies early in the crisis, see Spilimbergo and others 2008; Freedman and others 2009; Mankiw 2009a; Wolf 2009, 2010c, 2013a, 2013b; and the U.S. Department of the Treasury 2013. There have been intense debates on the effectiveness of the large fiscal stimulus implemented by the United States early in the crisis. Matthews (2011) provides a brief evaluation of nine studies on the subject (see also Cochrane 2009b; Frankel 2013; Council of Economic Advisers 2014a; Furman 2014; Krugman 2014a; Davies 2014; and Luce 2014). Coenen and others (2012) evaluate the effectiveness of discretionary fiscal policy in the euro area during the crisis. Végh and Vuletin (2013) analyze fiscal policy responses during the Latin American crisis and the euro area crisis. They conclude that procyclical fiscal policy has aggravated the duration and intensity of the crisis in both cases. Chari and Henry (2013) compare policy responses during the Asian crisis and the global financial crisis. They document that the fiscal adjustment in Asia was far more modest than is commonly known and that the switch from stimulus to austerity in Europe was quite abrupt. They conclude that the difference in fiscal stance helps explain the difference in the postcrisis paths of output and employment in the two regions. Davies (2012) draws some lessons from the Asian crisis for Europe. Wolf (2010a) considers the Japanese experience and draws parallels with the current episode. Wolf (2014) analyzes the experience of the economies that experienced credit cycles. Kollman, Roeger, and Veld (2012) examine government support programs to the financial sector during the crisis. Laeven and Valencia (2011) evaluate the implications of financial sector interventions for the real economy during the crisis. Claessens and others (2014) include several studies about various macroeconomic and structural policy measures that can help mitigate the adverse effects of financial crises.

The change in the direction of fiscal policy in the United States has also been a subject of intense debates. For example, Krugman (2014a) argues that “So, let me make the obvious point, just in case anyone missed it: the “pivot” of 2010—when all the Very Serious People decided that the danger from debt trumped any and all concern for job creation—was an utter disaster, economic and human. It was even a disaster in fiscal terms, because a permanently depressed economy will cost far more in revenue than was saved by slashing the deficit by a few percent of GDP in the short term.” On the opposite side, Sachs (2015) argues that although we need larger government spending relative to GDP, we should pay for this through higher taxes on the wealthy since there is nothing progressive about large budget deficits and a rising debt-to-GDP ratio. Similarly, Cochrane (2014) notes that “by Keynesian logic, fraud is good; thieves have notoriously high marginal propensity to consume. That’s a hard sell, so stimulus is routinely dressed in ‘infrastructure’ clothes. In the context of the United Kingdom, there was also a passionate debate about the direction of fiscal policy. Wolf (2013b) claims that “Austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed.” George Osborne (2014), Chancellor of the Exchequer of the United Kingdom, defends the fiscal policy his government implemented: “Our economy has grown faster than any other in the G-7 over the past year and is now forecast by the International Monetary Fund to do the same in 2014. This is despite warnings from some that our determined pursuit of our economic plan made that impossible. At the same time, job creation has been better than anyone expected: three times faster than any previous U.K. recovery, with more than four new jobs in the private sector for every job lost in the public sector. All of this demonstrates that fiscal consolidation and economic recovery go together, and it undermines the pessimistic prognosis that only further fiscal stimulus can drive sustainable growth. Indeed, that is precisely the wrong prescription.”

In 2012, fiscal deficits declined to 6 percent of GDP in the advanced economies and 2 percent of GDP in the emerging market economies (IMF 2013b).

After Herndon, Ash, and Pollin (2013) point out some problems in a study by Reinhart and Rogoff (2010a), the debate on the impact of public debt on economic growth has become even more intense. Although other studies also document a negative correlation between public debt and economic growth, there is no conclusive evidence suggesting a causal relationship running from debt to growth (IMF 2012b; Panizza and Presbitero 2013).

In December 2013, the Federal Reserve decided to start reducing the pace of its asset purchases beginning in January 2014 (FOMC 2013).

In addition, IMF 2014c notes that “in most advanced economies, the pace of fiscal consolidation will slow in 2014 as average gross debt stabilizes and the focus shifts appropriately toward ensuring that the composition of adjustment supports the still uneven recovery.”

For a discussion of how the financial crisis has affected the design of macroeconomic policies, see Blanchard, Dell’Ariccia, and Mauro 2010, 2013; Blanchard and others 2012; and Taylor 2014a.

See, for instance, Blanchard and Perotti 2002; DeLong and Summers 2012; Blanchard and Leigh 2013b; Christiano, Eichenbaum, and Rebelo 2011; Ramey 2011; Auerbach and Gorodnichenko 2012; and Chinn 2014. One limitation of these studies is the difficulty in identifying truly exogenous policy changes (Alesina 2012; Alesina and Giavazzi 2013). This issue is complicated by the fact that fiscal and monetary policy changes are often simultaneous. Romer (2013) argues that one of the lessons from the Great Depression is that fiscal policy is a very effective tool to spur recovery. Alesina and Ardagna (2010) report that fiscal consolidation (particularly that based on spending cuts as opposed to tax increases) can be expansionary. More recent evidence, however, suggests that expansionary austerity is very rare (Perotti 2012) and, when properly measured, fiscal consolidation is indeed contractionary (Guajardo, Leigh, and Pescatori 2011). Mankiw (2009a) also provides a discussion of this issue.

Sargent and Wallace (1975) provide a discussion of this idea. See also Barro 1981 and Lucas 1975, 1977. Lucas (1995) argues that the distinction between anticipated and unanticipated money shocks is one of the main findings of research on monetary policy. While the anticipated monetary expansions affect nominal variables (that is, interest rates and inflation tax effects), the unanticipated monetary expansions can temporarily influence production and employment.

For the effectiveness of monetary policies under these circumstances, see Eggertsson and Woodford 2003; Krishnamurthy and Vissing-Jorgensen 2011; Carvalho, Eusipe, and Grisse 2012; Woodford 2012; Bauer and Rudebusch 2012; Baumeister and Benati 2010; Chen, Cúrdia, and Ferrero 2012; and Swanson and Williams 2013, among others.

Williamson (2013) makes this point and examines how the changes in the size and composition of central bank balance sheets can affect monetary policy. Gagnon and Sack (2014) discuss the implications of a large balance sheet and substantial amount of liquidity in the financial system.

There is broad agreement that unconventional monetary policies (based on liquidity provision and private asset purchases) at the early stages of the crisis were also effective in restoring the functioning of financial markets (IMF 2013c).

These findings have been partially confirmed by other studies in the United States and United Kingdom employing different methodologies (see, for instance, Krishnamurthy and Vissing-Jorgensen 2011, 2013; Gagnon and others 2011; Joyce and others 2010). Fischer 2015 notes that asset purchases have helped make financial conditions overall more accommodative and have provided significant stimulus for the broader economy.

Some of these risks or costs are also discussed in Bernanke 2012a. Yellen (2013b) argues that financial stability risks in the United States are being carefully monitored and that currently there is no pervasive evidence of excessive credit growth, a buildup of leverage, or asset bubbles. However, she admits that the financial stability concern is the most important potential cost of the monetary policy stance since the global financial crisis. A prolonged period of monetary accommodation in the advanced economies could weaken the resolve to repair and reform financial entities, encourage excessive risk taking by economic agents, and promote large capital flows to emerging market economies (Caruana 2013, Feldstein 2013, IMF 2013c, Stein 2013).

The IMF provided descriptions of the differential performance across various regions during the global recession and recovery. For example, IMF 2009b mentions the challenges of the Middle East and Central Asia region and notes that “The global crisis is now affecting the countries in the Middle East and Central Asia region, and economic and financial vulnerabilities are rising. In the Middle East and North Africa, good economic fundamentals, appropriate policy responses, and sizable currency reserves are helping mitigate the impact of the shock. In the Caucasus and Central Asia, lower commodity prices and adverse economic developments in Russia have hit hard.” IMF 2010b observes the strong performance of Asian economies: “Asia has entered the second year of the global economic expansion still firmly in the lead of the recovery. Growth in the first half of 2010 proceeded well above trend in almost all regional economies, as global manufacturing continued to rebound and fueled exports and investment in the region.” IMF 2010c discusses the rapid growth in the Latin America and Caribbean region: “A multispeed global recovery is under way, with some emerging markets in the lead and the major advanced economies growing more slowly. This macroeconomic setting has brought a return to easy global financial conditions and high commodity prices—a situation likely to be sustained for some time but unlikely to be permanent. Against that external backdrop, the recovery in the Latin America and Caribbean region overall is advancing faster than anticipated, but moving at different speeds across countries.” These themes are also discussed in IMF 2015a and IMF 2015b.

Goldstein and Khan 1982; Dornbusch 1985; Hoffmaister, Pradhan, and Samiei 1998; Frankel and Roubini 2001; IMF 2001d; and Calvo and others 2001 analyze the linkages between advanced and emerging market economies. Currie and Vines 1988 and Chui and others 2002 present surveys of studies focusing on trade and growth in the context of North-South interactions. Another branch of this research program examines the role of trading partners’ economic performance in driving the dynamics of domestic growth (see Akin and Kose 2008 for a summary).

Lewis (1980) makes this observation. Akin and Kose (2008) examine the extent of growth spillovers from the advanced economies to the emerging market economies and concludes that the impact of the former group on the growth dynamics of the latter has declined over time.

LIBOR is an index of the interest rates at which banks are willing to offer to lend unsecured funds to other banks in the London wholesale money market. We provide the details of our model and present an extensive discussion of our findings in Kose, Loungani, and Terrones 2013b.

Appendix J presents the details of regression results.

A number of papers study these types of asymmetric effects of interest rates on output during recessions and expansions (Garcia and Schaller 2002; Sensier, Osborn, and Ocal 2002; Karras 1996).

Forbes and Warnock (2012) find evidence that global factors are key drivers of waves of international capital flows. These factors become especially important during global recessions (as we saw during the latest episode) because foreign investors can rapidly reduce their bank and equity flows. Milesi-Ferretti and Tille (2011) report that countries with large precrisis debt positions indeed witnessed much larger outflows of capital at the height of the 2009 global recession.

Kose, Otrok, and Prasad (2012) provide details about the roles played by global and national factors in driving cycles in advanced, emerging market, and other developing economies.

Gourinchas and Kose (2010, 2011) present summaries of recent studies analyzing the transmission of the global financial crisis across borders through trade and financial linkages.

For example, Arora and Vamvakidis (2004) find that advanced economies benefit from trading with rapidly growing emerging market economies, while developing economies benefit from trading with the relatively high-income advanced economies. Helbling and others (2007) find that spillovers from the United States to other economies have increased with greater trade and financial integration.

These types of terms-of-trade shocks tend to play a more important role in countries connected to each other through vertical linkages involving multinational production chains. Research indicates that vertical linkages appear to amplify transmission of business cycles across borders (Kose and Yi 2001, 2006; Burstein, Kurz, and Tesar 2008; di Giovanni and Levchenko 2010; Chinn, 2013).

Blanchard and Milesi-Ferretti (2009, 2012) discuss the implications of global imbalances and policies to adjust them.

An extensive research program has analyzed the benefits and costs of policy coordination. Most studies suggest that given the costs of reaching a consensus among countries with different objectives, the benefits of policy coordination are quite small (Oudiz and Sachs 1985; Obstfeld and Rogoff 2002; Williamson 2005; Stiglitz 2009; Angeloni and Pisani-Ferry 2012; Taylor 2013a). Analyzing the implications of fiscal policy coordination at the zero lower bound, Gomes and others (2015) show that international coordination is helpful but it does not necessarily play a major role.

The importance of policy coordination was also emphasized in previous global recessions. For example, Nossiter (1974) describes the expectations of the international organizations during the 1975 episode: “The International Monetary Fund notes that it has appealed for global coordination in the past ‘but never with greater urgency than at the present time.’ The IMF calls the unbalanced accounts created by the oil states a ‘disequilibrium wholly unprecedented in size and character.’ A failure to redistribute these funds, it warns, ‘could seriously damage the world economy.’ In the same vein, the Organization for Economic Coordination and Development, a grouping of the wealthiest nations, declares: ‘Cooperation and consultation between governments have never been more necessary than they are today, given the unaccustomed and troubled waters on which the world economy is now embarked.’” In 1983, The Economist ran a piece by Helmut Schmidt, ex-chancellor of Germany, about the necessary policy measures to head off a global recession. He noted that “The world’s economic interdependence has never been greater than it is this decade. It has never been more necessary to make sure that economic policies complement each other and are internationally compatible. Never has co-operation been as necessary as today. Just as democracies cannot keep going without a general consensus about the rules, the world economy cannot survive without agreement on the rules of the game and the distribution of roles” (The Economist 1983). In 1992, the U.S. Treasury noted that “Since the mid-1980s, the Group of Seven (G7) has worked intensively to achieve consistent and compatible policies and performance necessary for sustained growth with price stability, reduced external imbalances and greater stability of exchange markets. The economic policy coordination process grew directly out of each country’s growing recognition that, in an interdependent world, economic performance at home depends in large part on economic developments in the rest of the world, and particularly in the major industrial economies. As recent experience has once again demonstrated, the formulation of economic policies—especially fiscal and monetary policies—by individual G7 countries has a major impact on the economies of the others. Moreover, no individual G7 member acting alone can overcome economic difficulties which affect all of the G7 economies” (Department of the Treasury 1992). Uchitelle (1991) explains how the international policy coordination effort failed during the G7 meeting in April 1991.

The G20 web page states that “the G20 is the premier forum for international cooperation on the most important issues of the global economic and financial agenda. The objectives of the G20 refer to: (i) policy coordination between its members in order to achieve global economic stability and sustainable growth; (ii) promoting financial regulations that reduce risks and prevent future financial crises; and (iii) modernizing international financial architecture.”

Despite its initial success, the effectiveness of the G20 has become a topic of debate, especially after 2010 (Angeloni and Pisani-Ferry 2012; Faruqee and Srinivasan 2012). O’Neill and Terzi (2014) make predictions about the world economy in 2020 and conclude that “If our projections to 2020 are broadly right, then many established frameworks for the running of the world economy and its governance are not going to be fit for purpose, and will need to change. The global monetary system itself, and global organizations such as the IMF, G7 and G20 will have to adapt considerably if they want to remain legitimate representatives of the world order. The alternative is their relegation to irrelevance.”

There has been an intense debate on the feasibility and benefits of international monetary policy coordination in light of the developments in financial markets in emerging market economies following the announcements of tapering of bond purchases by the U.S. Federal Reserve in mid-2013. Raghuram Rajan, governor of the Reserve Bank of India, made a strong case for coordination: “Hence, my call is for more coordination in monetary policy because I think it would be an immense improvement over the current international non-system. International monetary policy coordination, of course, is unpopular among central bankers, and I therefore have to say why I reiterate the call and what I mean by it. I do not mean that central bankers sit around a table and make policy collectively, nor do I mean that they call each other regularly and coordinate actions. In its strong form, I propose that large country central banks, both in advanced countries and emerging markets, internalize more of the spillovers from their policies in their mandate, and are forced by new conventions on the ‘rules of the game’ to avoid unconventional policies with large adverse spillovers and questionable domestic benefits” (Rajan 2014). Harding (2014) notes that “Janet Yellen has turned a cold shoulder to the pleas of emerging markets by signaling that only a domestic slowdown will influence US monetary policy, in comments that suggest there will be no relief for those countries being battered by the Fed’s reduction of its asset purchases.” William F. Dudley, president of the Federal Reserve Bank of New York, argues that “Moreover, it is far from clear that explicitly coordinated policy would produce better outcomes for the global economy generally, or the EMEs (emerging market economies) specifically. Central banks have challenges enough in tailoring policies to their domestic circumstances. I believe that it would be taking on too much to attempt to collectively fashion policy in reference to global conditions. Moreover, our last system of explicit coordination—the system of fixed exchange rates under Bretton Woods—broke down for a reason. Monetary policy meant to suit everybody is likely in the end to suit nobody” (Dudley 2014). Prasad (2014) emphasizes the importance of addressing domestic vulnerabilities in emerging market economies and notes that “Rather than fulminating about other countries’ monetary policies, national leaders ought to put their own houses in order. Monetary authorities should focus on delivering low inflation and financial stability. If central bankers wage proxy battles on behalf of their feckless political leaders, they risk damaging their own hard-won credibility, independence and effectiveness.” Christine Lagarde, managing director of the IMF, often emphasizes the importance of policy coordination: “Getting beyond the crisis still requires a sustained and substantial policy effort, coordination, and the right policy mix” (Lagarde 2014).

Blanchard (2013) discusses the importance of advancing research on policies.

McKinsey Global Institute (2013) analyzes the evolution of financial flows in recent years. Kose and others (2010) present a review of the literature on the implications of financial flows for macroeconomic stability and long-term growth.

For a discussion about the end of the business cycles in the 1960s, see Bronfenbrenner 1969 and Gordon 1970. The Economist (1989) noted that “thousands of economists have studied the business cycle—the regular swings in economic activity between boom and bust. But just as they thought they understood its causes and consequences, it seems to be disappearing.” Weber (1997) discusses the end of the cycle in light of developments during the late 1990s. The Economist (1998) noted that “History is, indeed, littered with premature obituaries of the business cycle. In the late 1920s, on the eve of the Depression, there was talk of a new industrial era of rapid, everlasting growth. In the late 1960s, Arthur Okun, an economic adviser to Presidents Kennedy and Johnson, proclaimed that the business cycle was ‘obsolete’—and the Commerce Department was so confident that it decided to change the name of one of its publications from Business Cycle Developments to Business Conditions Digest. A recession began a year later.” Businessweek, in a cover story in early 2000, claimed that we lived in an era of a new economy: “It seems almost too good to be true. With the information technology sector leading the way, the U.S. has enjoyed almost 4% growth since 1994. Unemployment has fallen from 6 percent to about 4 percent, and inflation just keeps getting lower and lower… consumer inflation in 1999 was only 1.9 percent, the smallest increase in 34 years. This spectacular boom was not built on smoke and mirrors… The result is the so-called New Economy: faster growth and lower inflation” (Businessweek 2000).