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IMF Country Report No. 11/203
July
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2011 Article IV consultation with United States, the following documents have been released and are included in this package:
• Spillover Report for the 2011 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 27, 2011, with the officials of United States on economic developments and policies. Based on information available at the time of these discussions, the spillover report was completed on July 7, 2011. The views expressed in the spillover report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
• Spillover Report - Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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© 2011 International Monetary Fund
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July 22, 2011
UNITED STATES
SPILLOVER REPORT - 2011 ARTICLE IV CONSULTATION
KEY POINTS
Issues. Spillover reports explore the external effects of policies in systemic economies, focusing on concerns raised by key partners. Foreign officials appreciated the boost to world growth from U.S. stimulus but were concerned over unintended consequences. Loose U.S. monetary policies could fuel unsustainable capital flows and commodity prices; high U.S. government deficits create tail risks of a generalized bond shock; and laws and rule changes passed ahead of Basel III could foster financial sector arbitrage
Findings. The main messages flowing from staff analysis are:
Short-term U.S. spillovers on growth abroad are uniquely large, mainly reflecting the pivotal role of U.S. markets in global asset price discovery. While U.S. trade is important, outside of close neighbors it is the global bellwether nature of U.S. bond and equity markets that generates the majority of spillovers.
U.S. macroeconomic stimulus likely supported foreign activity more in 2009 than in 2010. Facing global turmoil, 2009 initiatives calmed markets. In the less fraught 2010 environment similar policies produced a less favorable response.
Looking forward:
With QE2 having limited spillovers, its fully anticipated ending will have even less effects. The main monetary exit risk is that expectations of monetary tightening would reverse earlier capital flows to other countries.
Spillovers from credible and gradual fiscal consolidation are limited and ambiguously signed, while those from the tail risk of a potential loss of confidence in U.S. debt sustainability are universally large and negative.
Robust supervision of U.S.-based (not necessarily U.S.-owned) investment banks can reduce risks of negative global spillovers via dollar funding markets.
Overall, U.S. and foreign goals may be better aligned for fiscal and financial policies, given a common interest in limiting globally important tail risks, than for monetary policies, where low interest rates facilitate financial risk-taking.
Approved By
Tamim Bayoumi and Rodrigo Valdés
This report was prepared by a staff team comprising Tamim Bayoumi (head), Ashok Bhatia, Edouard Vidon, and Francis Vitek (all SPR), Martin Sommer (WHD), Alasdair Scott and Hui Tong (RES), and Andy Jobst (MCM). Additional inputs were provided by Trung Bui, Sean Cogliardi, and Manju Ismael (all SPR).
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SPILLOVER REPORTS
Spillover reports examine the external effects of policies in five systemic economies (the “S5”): China, the Euro Area, Japan, the United Kingdom, and the United States. The mere existence of external effects does not imply that policy modification or collective action is needed—that depends on many factors, including the presence of economic externalities. The aim is to stimulate discussion, providing a global perspective for policy advice in Article IV discussions and input to the Fund’s broader multilateral surveillance.
In each case, key partners are asked about outward spillovers from the economy in question, on the basis of which staff choose issues for analysis. To facilitate candor, spillover reports do not cite who raises a specific issue. For this report, those consulted were officials and analysts from the other S5 and from selected emerging markets—Brazil, Hong Kong SAR, India, Indonesia, Korea, Mexico, Poland, Russia, Singapore, and Thailand.
This report does not try to capture the totality of U.S. influence on the world economy. Rather, it focuses on a few forward-looking issues raised by partners, brings to bear relevant analysis, and describes the reactions of the U.S. authorities. Technical papers underlying the analysis can be found in a companion Selected Issues paper (www.imf.org). A separate report will summarize the cross-cutting themes emerging from discussions with the S5.
Contents
SETTING THE SCENE: THE SIZE AND SOURCES OF U.S. SPILLOVERS
BACKGROUND: MAPPING THE LINKAGES
A. Direct Financial Ties
B. Trade Relationships
C. Asset Price Links
D. Global Liquidity
MOTIVATION: VIEWS OF OTHER AUTHORITIES ON U.S. POLICY SPILLOVERS
ANALYSIS: POLICY SPILLOVERS
A. Monetary Policy: Quantitative Easing and Future Rate Hikes
B. Fiscal Policy: Stimulus and Consolidation
C. Financial Policy: Investment Banking and the Dodd-Frank Act
CONCLUSIONS
FIGURES
1. Estimated Bond Yield and Exchange Rates Spillovers
2. Estimated U.S. Monetary Policy Spillovers
3. Estimated U.S. Fiscal Spillovers
4. Estimated U.S. Financial Policy Spillovers
COUNTRY FLAGS USED IN FIGURES
Citation: IMF Staff Country Reports 2011, 203; 10.5089/9781462317349.002.A000
COUNTRY FLAGS USED IN FIGURES
Citation: IMF Staff Country Reports 2011, 203; 10.5089/9781462317349.002.A000
COUNTRY FLAGS USED IN FIGURES
Citation: IMF Staff Country Reports 2011, 203; 10.5089/9781462317349.002.A000
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INTERNATIONAL MONETARY FUND
UNITED STATES
Front Matter Page
Approved by Tamim Bayoumi
July 22, 2011
Contents
I. U.S. Financial Spillovers: Typical Advanced Country Responses
II. U.S. Financial Spillovers: Policy Announcements
III. U.S. Financial Spillovers: Emerging Market Bond Spreads
IV. U.S. Growth Spillovers: Typical Responses
V. U.S. Trade Spillovers: Supply Chain Effects
VI. U.S. Trade Spillovers: Typical Response to U.S. Activity
VII. U.S. Financial Spillovers: Crossborder Linkages
VIII. U.S. Monetary Policy Spillovers: Quantitative Easing and Capital Flows into Emerging Markets
IX. U.S. Growth Spillovers: Monetary Policy
X. U.S. Fiscal Spillovers: Global Financing Conditions
XI. U.S. Growth Spillovers: Fiscal Policy
XII. U.S. Financial Spillovers: Raising U.S. Capital Adequacy Requirements
XIII. U.S. Financial Spillovers: Banking System Risks
Tables
2.1: Bank Excess Return Regressions
2.2: Foreign Bond Yield Regressions
2.3: Dollar Exchange Rate Regressions
3.1: Panel Regression Results for EM Spreads Model
5.1: Measures of Vertical specialization across borders: 2004
10.1: Baseline Regressions, Dependent Variable: Spread over 10-year Treasuries
10.2: Regressions with Interaction Terms
Figures
1.1: Spillovers from Shocks to Bond Yields
1.2: Spillovers from Shocks to Stock Indices
4.1: Average Peak Impulse Responses of Output to Shocks in the U.S
4.2: International Business Cycle Transmission from Systemic Economies
4.3: Average Impulse Responses of Output to Shocks in the United States
4.4: Average Peak Impulse Responses of Output to Shocks in the United States
5.1: Nafta: source of Foreign Value Added
5.2: Foreign Content in U.S. Manufacturing Exports
6.1: Impact of a Shock in U.S. Import Demand on Partners’ Net Exports
7.1: S4 financial Intermediaries, 2009
7.2: Foreign Bank claims on and in the United States, March 2010
7.3: Consolidated U.s. Claims of BIS Reporting Banks on Ultimate Risk Basis, by foreign-Owned Large BHC or Primary Dealer, March 2010
7.4: Foreign Owners of Larch BHCs in the United States
8.1: Accumulated Responses of EM Inflows - Baseline VAR
8.2: Accumulated Responses of Selected Variables - Extended VAR
8.3: Accumulated Responses of VIX and Oil Prices to QE Actions
9.1: Peak Output Gains, Typical Monetary Stimulus
9.2: Peak Output Gains, QE1
9.3: Peak Output Gains, QE2
9.4: Peak Output Gains
11.1: Cumulative Output Effects, 2011-2016
11.2: Peak Output Losses
12.1: Peak Output Losses Under Baseline Scenario
12.2: Peak Output Losses Under Alternative Scenario
13.1: United States: Comparison of Individual and Systemic Risk in the Banking Sector - based on synthetic CDS spreads (CCA Equity Put)
13.2: United States: Comparison of Individual and Systemic Risk in the Banking Sector - based on actual CDS spreads
13.3: Europe: Comparison of Individual and Systemic Risk in the Banking Sector - based on synthetic CDS spreads
13.4: Europe: Comparison of Individual and Systemic Risk in the Banking Sector - based on actual CDS spreads
13.5: Dynamic Dependence Structure - Spillover between the U.S. and European Banking Sector (2007-2011)
13.6: Dynamic Dependence Structure - Spillover between the U.S. and European Banking Sector (2007-2011)
