Notes and Manuals > Spillover Notes

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Francisco Arizala, Mr. Matthieu Bellon, Ms. Margaux MacDonald, Mr. Montfort Mlachila, and Mustafa Yenice
After close to two decades of strong economic activity, overall growth in sub-Saharan Africa decelerated markedly in 2015–16 as the largest economies experienced negative or flat growth. Regional growth started recovering in 2017, but the question remains of how trends in the economies stuck in low gear will spill over to the countries that have maintained robust growth. This note illuminates the discussion by identifying growth spillover channels. The focus is on trade, banking, financial, remittance, investment, fiscal, and security channels, which are the most prominent and most likely to transmit growth trends across borders. In addition to bringing together findings from a broad array of existing research, the note identifies countries that are the most likely sources of regional spillovers and those that are most likely to be impacted, and provides estimates for the size of these channels. It finds that intraregional trade and remittance flows are an important channel for growth spillovers, while banking channels are less important but will remain a risk going forward. Finally, the note documents other important spillover channels through financial markets contagion, revenue-sharing arrangements in fiscal unions, commodity-pricing policies, corporate investment, and forced migration. The main takeaway is that the level of interdependence among sub-Saharan countries is higher than is generally assumed. Consequently, there is a need for additional emphasis on regional surveillance and spillover analysis, along with traditional bilateral surveillance.
Ms. Adina Popescu and Mr. Ippei Shibata
This note analyzes the impact of preannounced government spending shocks in the United States on the real effective exchange rate and the trade balance. Using a vector autoregression framework that allows anticipated fiscal shocks to be identified using survey information, we find that preannounced spending shocks lead to a sizable real effective dollar appreciation and a worsening of both the aggregate trade balance and bilateral trade balances in a panel of partner countries. The results are robust to controlling for country-specific variables like the macroeconomic and policy conditions in the recipient countries, are generalized across regions and might have decreased during the zero-interest-lower-bound regime.
Patrick Blagrave, Giang Ho, Ksenia Koloskova, and Mr. Esteban Vesperoni
Are fiscal spillovers today as large as they were during the global financial crisis? How do they depend on economic and policy conditions? This note informs the debate on the cross-border impact of fiscal policy on economic activity, shedding light on the magnitude and the factors affecting transmission, such as the fiscal instruments used, cyclical positions, monetary policy conditions, and exchange rate regimes. The note assesses spillovers from five major advanced economies (France, Germany, Japan, United Kingdom, United States) on 55 advanced and emerging market economies that represent 85 percent of global output, looking at government-spending and tax revenue shocks during expansion and consolidation episodes. It finds that fiscal spillovers are economically significant in the presence of slack and/or accommodative monetary policy—and considerably smaller otherwise, which suggests that spillovers are large when domestic multipliers are also large. It also finds that spillovers from government-spending shocks are larger and more persistent than those from tax shocks and that transmission may be stronger among countries with fixed exchange rates. The evidence suggests that although spillovers from fiscal policies in the current environment may not be as large as they were during the crisis, they may still be important under certain economic circumstances.
Davide Furceri, João Tovar Jalles, and Ms. Aleksandra Zdzienicka
Until recently, China has been the leading contributor to global economic growth and—since the recent global financial crisis—a stabilizing driver of its evolution. However, as China recently began to rebalance its economy away from investment and exports and toward consumption, its GDP growth slowed significantly—partly reversing the country’s contribution to global output and trade growth—and is expected to continue to decline gradually over the medium term. There is little consensus regarding the consequences of a China’s growth slowdown for the rest of the world, with some arguing that a significant slowdown in China may have large implications and possibly lead to a worldwide recession if the “rebalancing” process is not well managed, and others suggesting that even a significant slowdown in China is unlikely to have large global effects, as its role in the world economy is still limited This note contributes to the ongoing debate by analyzing how growth shocks in China affect particular regions and country groups and how the impact and key transmission channels of these growth shocks have increased over time. It finds that historically, the average impact of growth shocks in China on global output has been statistically significant but limited, but since the early 2000s, the magnitude of spillovers has significantly increased. Trade linkages remain the main transmission channels, with larger effects for net commodity exporters and countries mostly exporting manufacturing goods. Also, spillover effects tend to be larger during periods of high global uncertainty and have been positively associated with an increase in the share of industry in total value in China, which suggests an important role of the “rebalancing” process.
Mr. Jesus R Gonzalez-Garcia, Mr. Ermal Hitaj, Mr. Montfort Mlachila, Arina Viseth, and Mustafa Yenice
Amid rapid population growth, migration in sub-Saharan Africa has been increasing briskly over the last 20 years. Up to the 1990s, the stock of migrants—citizens of one country living in another country—was dominated by intraregional migration, but over the last 15 years, migration outside the region has picked up sharply. In the coming decades, sub-Saharan African migration will be shaped by an ongoing demographic transition involving an enlargement of the working-age population, and migration outside the region, in particular to advanced economies, is set to continue expanding. This note explores the main drivers of sub-Saharan African migration, focusing on migration outside the region, as this has greater global spillovers. It finds that the economic impact of migration for the region occurs mainly through two channels. First, the migration of young and educated workers—brain drain—takes a toll as human capital is already scarce in the region, although some recent studies suggest that migration may have also a positive effect—brain gain. Second, remittances represent an important source of foreign exchange and income in a number of sub-Saharan African countries, contribute to the alleviation of poverty, and help smooth business cycles.
Ms. Florence Jaumotte, Ksenia Koloskova, and Ms. Sweta Chaman Saxena

The recent refugee surge has brought attention to the macro-critical policy issue of migration, including speculations that migration can be an unfavorable phenomenon for the receiving economies. A careful examination of the impact of migration on host economies is thus critical. Focusing on the economic impact, most of the academic discussion has centered on the effect of migration on labor markets and public finances. Much less is known about the long-term impact of immigration on the GDP per capita (or the standard of living) of host economies. This note makes three contributions to estimating this impact: it uses a restricted sample of advanced economies rather than a mixed sample of higher- and lower-income host countries, it examines whether the GDP per capita impact varies for different skill levels of migrants, and it goes beyond the aggregate impact of migration on GDP per capita to examine how broadly gains in this regard are shared across the population. In particular, it examines whether migration impacts the income levels of those both at the top and at the bottom of the earnings distribution, or whether gains are instead concentrated in a small group of high earners. It finds that immigration significantly increases GDP per capita in advanced economies, that both high- and lower-skilled migrants can raise labor productivity, and that an increase in the migrant share benefits the average income per capita of both the bottom 90 percent and the top 10 percent of earners, suggesting the gains from immigration are broadly shared.

Mr. Julian T Chow, Ms. Florence Jaumotte, Mr. Seok G Park, and Ms. Yuanyan S Zhang
The recent strong, sustained appreciation of the U.S. dollar raises questions about possible financial spillover effects for emerging markets and developing countries. This report finds that, unlike past episodes, emerging markets’ vulnerability has improved along a number of dimensions, though some risks persist (as identified in this report).
Ms. Christina Kolerus, Mr. Papa M N'Diaye, and Christian Saborowski
This note assesses empirically the role Chinese activity plays in global commodities markets, showing that the strength of China’s economic activity has a significant bearing on commodity prices, but that the impact differs across commodity markets, with industrial production shocks having a substantial impact on metals and crude oil prices and less so on food prices. The size of the impact on the prices of specific commodities varies with China’s footprint in the market for those commodities; the empirical estimates indicate that, over a one-year horizon, a 1 percent increase in industrial production leads to a 5–7 percent rise in metals and fuel prices. The surprise component in Chinese industrial production announcements has a bearing on commodity prices that is comparable in magnitude to that of industrial production surprises in the United States, and this impact is much larger when global risk aversion is high.
Ms. Carolina Osorio Buitron and Mr. Esteban Vesperoni
This report analyzes the possible spillover effects that could result if the U.S. normalizes its monetary policy while euro area countries are increasing monetary stimulus (a situation referred to as asynchronous monetary conditions). This analysis identifies country-specific shocks to economic activity and monetary conditions since the early 1990s, finding that real and monetary conditions in the United States and the euro area have oftentimes been asynchronous and have often resulted in significant spillover effects, particularly since early 2014.
Ara Stepanyan, Agustin Roitman, Gohar Minasyan, Ms. Dragana Ostojic, and Mr. Natan P. Epstein
In the face of sharply lower oil prices and geopolitical tensions and sanctions, economic activity in Russia decelerated in late 2014, resulting in negative spillovers on Commonwealth of Independent States (CIS) and, to a lesser extent, on Baltic countries. The spillovers to eastern Europe have been limited. The degree of impact is commensurate with the level of these countries’ trade, remittances, and foreign direct investment (FDI) links with Russia. So far, policy action by the affected countries has focused on mitigating the immediate consequences of spillovers.