Abstract
Main Findings
Chapter III. Fund Advice on Stimulus and Exit Policies1
Main Findings
Fund advice at the onset of the crisis was bold, in particular on stimulus, and overall seen by the Membership as timely and adapting to changes in circumstances. There was broad consistency between various surveillance products.
Messages on stimulus were very clear and the size of the advised stimulus was broadly informed by sustainability considerations based on available information at the time. However the link with implicit liabilities due to financial sector assistance could have been made more explicit in some cases.
Advice on exit was more nuanced, partly reflecting greater complexities in outlooks and divergence in the speed of recovery across countries. Recommendations on exit had to balance the need to support the recovery and sustainability considerations.
While there were some divergences between Fund advice and authorities‘ views, the overall policy stance was broadly in line with Fund advice.
Multilateral surveillance products had explicit spillover analyses. However, the coverage of spillovers and cross-country analysis in bilateral surveillance was uneven, including for systemically-important countries.
Key Lessons
Strong impact, both externally and internally, of a clear multilateral message to the membership.
Importance of thinking through risk scenarios and taking into account macro-financial linkages, e.g. possible impact of financial sector developments on fiscal balances.
Need to better integrate spillover analysis into Article IV consultations.
I. Introduction
1. This background study assesses the Fund’s multilateral and bilateral policy advice on macroeconomic stimulus/exit related to the global crisis The study covers the period from January 2008 to April 2011 and uses a range of sources to inform the findings (Box 1). This study looks at the perceived timeliness of policy advice in these areas, assesses whether a consistent approach has been taken, ensuring that policy advice was informed by country circumstances and risks; what consideration was given to spillovers analysis and whether policy advice could differ at times from the authorities‘ intentions (candor).
2. It is however too early to assess the adequacy of Fund advice As mentioned in the TSR concept note, it is beyond the scope of this study to look into the adequacy of the Fund‘s policy advice, which could be addressed in future reviews. While the stimulus was probably key to avoid a worse recession, the jury on the adequacy of Fund advice on stimulus and exit, and on the implemented policies, is largely still out. While the direct contribution of fiscal stimulus to the worsening of fiscal balances was limited (cf. April 2010 WEO), substantial uncertainty remains on how various countries will bring their fiscal policies back on a more sustainable path. Similarly, medium term consequences of loose monetary policies in the most developed economies remain to be fully assessed.
Sources
In addition to the broader TSR assessment methodologies (review of 50 Article IVs; interviews; surveys), this study draws upon the following:1
A review of the Fund‘s multilateral surveillance and related products for 2008–11, as well as press statements related to stimulus and exit policy advice.
A review of Board papers, Staff Position Papers, and Policy Review Notes on stimulus and exits.
An empirical assessment of key macroeconomic policy variables in 46 advanced and emerging countries and their relationship with fundamentals.2
A review of Article IV reports of China, Euro Area, Japan, the U.S., and the U.K. (economies covered by Spillover Reports).
A 12-country case study, including a review of Article IVs for the period 2008 to 2010, concluding statements, and back-to-office reports. The countries were selected to form a representative sample based on : i) income level: all income groups are represented in the sample and ii) the degree of fiscal vulnerabilities: at least two countries at different levels of fiscal vulnerabilities (with the level of maturing debt, the fiscal deficit, and total financing needs as indicators of fiscal vulnerabilities). Countries in the sample included: Angola, Australia, Canada, China, Ghana, India, Ireland, Spain, Turkey, the United Kingdom, the United States, and Vietnam.
II. Overview of Fund’s Messages on Stimulus and Exit
3. The Fund was one of the first institutions to make a strong call for global macroeconomic stimulus in response to the global economic downturn During the World Economic Forum‘s annual meeting in Davos in January 2008, the then Managing Director (MD) called for fiscal stimulus to complement monetary policy in addressing the global crisis (Figure 1). He repeated this message in a Financial Times interview in April 2008. Although initially generating some internal debate among staff, the external message was clear, but also nuanced, from the start. In particular, an unequivocal call for global stimulus in both press statements and multilateral products was linked to a more tailored message regarding the role of individual members tied to country-specific fundamentals, including the availability of fiscal space, countries‘ cyclical positions, inflationary pressures, and debt levels.
Timeline of Global Crisis
Citation: Policy Papers 2011, 066; 10.5089/9781498338561.007.A003
Note: Events that are not related to the IMF‘s advice on stimulus and exit policies are colored in red.4. Initially, the stimulus message was mainly targeted at advanced countries. In the April 2008 WEO staff supported the deep interest rate cuts by the U.S. Federal Reserve and indicated that the Euro Area could afford some easing of monetary policy in the context of an increasingly negative economic outlook. In the fall 2008 WEO, in the light of moderating inflationary pressures and deteriorating growth prospects, the Fund advised monetary easing for the Euro Area and the United Kingdom where interest rates remained high and called for a halt to the monetary policy tightening cycle in countries where second-round effects on inflation of commodity prices had been limited. As the balance of risks shifted to slowing activity, the message turned to easing where the outlook continued to deteriorate. This was followed through in bilateral policy advice in 2008–09. In 2009, the Fund supported unconventional monetary easing measures in the United Kingdom, the United States, and the Euro Area in view of already very low interest rates and the impaired monetary transmission and credit markets. The Fund also advised advanced countries to use fiscal policy to stabilize output in the event of a downturn in economic activity, while recognizing that room for stimulus was limited by public debt levels and efforts at medium-term consolidation, including pre-crisis initiatives. Multilateral advice on stimulus and exits had both a quantitative and a more qualitative dimension, including in particular the composition of the fiscal stimulus. Along with short-term policy advice, the Fund also emphasized long-term fiscal challenges, including the impact of entitlement spending and highlighted the need to maintain fiscal consolidation efforts in future years.
5. As the crisis deepened, the call for stimulus broadened. Until mid-2008, many emerging markets and developing economies were still facing inflationary pressures from the global increase in food and fuel prices—these countries were not included in the Fund‘s initial call for stimulus. Following the collapse of Lehman Brothers in September 2008, the Fund called for global stimulus—including in emerging economies and low-income countries (LICs) with adequate policy space. As the economic slowdown became more widespread, the MD called for a coordinated action plan to achieve a global fiscal stimulus equivalent to 2 percent of GDP during the G-20 leader‘s summit in November 2008.
6. In 2009, the Fund called for countries to start preparing exit strategies from the extraordinary stimulus measures. In the spring of 2009, the Fiscal Monitor called on policy makers to develop a post-crisis exit strategy involving measures that would reduce and sustain debt ratios at moderate levels. In the fall of 2009, it called on countries to announce credible fiscal exit strategies, while recognizing that it was still premature to exit from stimulus. The fall 2009 WEO warned against risks from implementing premature exits but also called on policymakers to begin preparing for an orderly unwinding of extraordinary levels of public intervention. In the spring of 2010, the WEO urged countries suffering from large increases in risk premia to begin fiscal consolidation, while most advanced countries were encouraged to consolidate in 2011. On the monetary front, the fall 2009 WEO stressed that the pace with which central bank balance sheets should be unwound depended on progress in normalizing market conditions and the types of interventions in place.
7. Reflecting greater complexities in the outlook and divergence in the speed of recovery by countries, the Fund’s message on short term exit policies was more differentiated. While a simple top-down message was straightforward to formulate and timely at the outset of the crisis when the world‘s economies were simultaneously hit by the same financial and real shocks, the length of the recession differed across economies, which made a unified message more difficult. Fund‘s calls to prepare for the withdrawal of stimulus measures came early, in 2009, but messages on the timing of exit had to balance considerations about the still fragile recovery with sustainability concerns on a case by case basis.
III. From Multilateral to Bilateral Advice
8. Multilateral policy advice on stimulus and exit policies provided a basis for bilateral policy advice, including through ad hoc papers. Staff prepared detailed analysis to translate multilateral messages into more operational and country-specific terms that would assist country teams in Article IV consultations. This was done through Board papers, Policy Review Notes, and Staff Position Notes2 on stimulus and exits (Box 2). These papers provided an analytical framework with which to guide bilateral policy advice on stimulus and exits. There was little evidence of inconsistencies between multilateral and bilateral policy advice on stimulus and exit policies.
IV. Clarity and Timeliness
9. Bilateral policy advice on stimulus and exit policies was found to be clear and substantiated across countries. In particular, the case study and Article IV review found that fiscal and monetary policy advice in most countries was clearly articulated, sufficiently detailed, placed in a medium-term context, and included a discussion of the impact of these policies on the economy.The magnitude, timing, and composition of proposed fiscal changes were also well-articulated and justified. For countries where staff recommended exit strategies, these were generally elaborated with some detail, including the timing of proposed measures. The Article IV review results showed that in countries where fiscal and monetary policy loosening had been implemented, staff reports have elaborated on exit strategies, including the timing, in most of the cases (70 percent).
Staff Papers on the Provision of Advice on Stimulus and Exit Policies
Staff prepared a number of analytical papers to guide policy advice on stimulus and exit. This included both published documents (Board papers, Staff Position Notes, and Technical Guidance Notes) and internal documents (Policy Review Notes). Board papers are either discussed at or circulated to the Board for information. Staff Position Notes present the latest policy-related analysis and research by individual IMF staff to elicit comment and to further debate. Technical Guidance Notes are meant to guide staff on technical aspects of certain issues. Policy Review Notes are intended to provide country teams with background analysis and references that may be useful for upcoming Article IV consultations.
Stimulus papers. The Board paper Fiscal Policy for the Crisis in December 2008 focused on the general features that fiscal stimulus should have. It also noted that not all countries had sufficient fiscal space to implement stimulus due to constraints on sustainability of fiscal finances, volatile capital flows, high public and foreign indebtedness, and large risk premia. The Staff Position Note The Case for Global Fiscal Stimulus (March 2009) presented evidence that a well-executed global fiscal stimulus could provide a boost to the global economy and urged countries to provide additional stimulus, while advising those with limited fiscal space to focus on actions that will have the largest impact on demand such as government investment and targeted transfers. The Staff Position Note (November 2009) Unconventional Choices for Unconventional Times: Credit and Quantitative Easing in Advanced Countries discussed options for unconventional monetary policy.
Exit papers. The Board paper, The State of Public Finances—Outlook and Medium-Term Policies After the 2008 Crisis (March 2009) highlighted elements to consider in formulating exit strategies. Exiting from Crisis Intervention Policies (a January 2010 Board paper) presented broad principles for devising exit strategies from crisis-related intervention policies in the areas of fiscal, monetary, and financial policies. It had two companion Board papers—Strategies for Fiscal Consolidation in the Post-Crisis World (February 2010) discussed elements of a fiscal exit strategy and institutions and arrangements that would support fiscal consolidation, while "Exiting from Monetary Crisis Intervention Measures—Background Paper" provided a detailed technical discussion of issues on how to exit from crisis intervention measures, including the unwinding of large amounts of long-term securities on central banks‘ balance sheets. The Board paper From Stimulus to Consolidation— Revenue and Expenditure Policies in Advanced and Emerging Economies (April 2010) identified policy tools to support fiscal consolidation in these countries. The Policy Review Note Practical Guide to Fiscal Consolidation (June 2010) drew upon these and related work to provide country teams with analysis and references for Article IV consultations, while the Policy Review Note Exiting from Extraordinary Monetary and Financial Support (June 2010), focusing mainly on exit strategies for advanced economies, highlighted principles for unwinding extraordinary conventional and unconventional support measures. The Technical Guidance Note, A Practical Guide to Debt Dynamics, Fiscal Sustainability, and Cyclical Adjustment of Budgetary Aggregates (January 2010) provides technical guidance on assessing medium-term fiscal sustainability.
10. The Fund’s advice during the crisis has generally been perceived to be timely and adding value. Country authorities and Executive Directors (EDs) generally found that Fund policy advice during the aftermath of the 2008 global crisis was timely (both 3.7 for country authorities and EDs on a scale of 1 to 5) and that it took into account changing conditions in the domestic and global economy (3.9 and 3.8, respectively, on a scale of 1 to 5). Country authorities rated the discussion of fiscal developments and policy during this period highest in terms of contributing to their understanding and insight (62 percent), a result similar to the 2008 TSR. Results were lower for monetary policy (38 percent) and somewhat less positive than in the 2008 TSR. This likely reflects the fact that this area is covered at the Euro Area level rather than in bilateral Article IV discussions.
Was the Fund policy advice timely?
Citation: Policy Papers 2011, 066; 10.5089/9781498338561.007.A003
Did Fund advice account for changing conditions?
Citation: Policy Papers 2011, 066; 10.5089/9781498338561.007.A003
V. Attention to Country-Specific Circumstances and Risks
11. Individual circumstances were mostly taken into account in framing the advice. Both country case studies and surveys found that policy advice in most countries took into account the country‘s debt levels and inflation outlook, but to a lesser extent financing constraints and financial sector vulnerabilities. This was also the case for the Euro Area as a whole. However, while assessing that the Fund‘s monetary policy advice was appropriate and contributed to the policy debate in the Euro Area, and that aggregate fiscal policy advice was appropriate and timely, the report by external consultants on IMF surveillance in the Euro Area notes that the advice on fiscal stimulus was not sufficiently differentiated across countries.3
Factors considered in Fund advice on fiscal and monetary policy 1/
Citation: Policy Papers 2011, 066; 10.5089/9781498338561.007.A003
1/ Based on Article IV health check.12. The need to preserve employment and to target fiscal measures, often made in multilateral stimulus advice, was less emphasized in bilateral surveillance. Multilateral surveillance products, as well as ad hoc papers, made the case for supportive macroeconomic policies to limit the downturn in employment, as well as for targeted measures aimed at addressing unemployment and protecting the most vulnerable4. For many countries in the case study, however, staff did not raise concerns pertaining to redistributive effects and the need to protect vulnerable groups in their policy advice, including for LICs. While one could argue that concerns about unemployment were implicit behind the policy advice for stimulus, explicit mentions in Article IV reports were also rare. For example, in the 2009 Article IV consultations with Australia and China, staff advised that income transfers should support low-income households and the recently unemployed. In the 2010 consultations with the U.S. and the U.K., staff suggested that in the case of a significant downturn, tax cuts should be targeted to support low-income households and promote employment creation. Regarding fiscal consolidation, the Article IV review indicated that the impact on employment of exit policies was only discussed in 10 percent of the countries covered.
13. Bilateral policy advice on stimulus was informed by possible contingent liabilities arising from financial sector vulnerabilities, in particular in the post-Lehman period (Box 3). A review of Article IV reports for selected countries (Ireland, Spain, the U.K., and the U.S.—selected on the basis of their relatively large financial sectors) indicates that where relevant, government contingent liabilities from weaknesses in the financial sector were noted.
14. However, the link could have been made more explicit in some cases – and risks are of an evolving nature. From its inception in July 2009, the IMF‘s Fiscal Monitor quantified direct and indirect government support of the financial sector on a country-by-country basis, and took these fiscal costs and risks into account in the discussion of the appropriate fiscal policy stance. For the country cases discussed below, the April 2011 Fiscal Monitor put the net deficit increasing direct cost (cumulative since the beginning of the crisis) at 29 percent of (2010) GDP for Ireland, with the cost for Spain (2.0 percent), the U.K. (6.0 percent) and the U.S. (3.4 percent) much lower. In all these cases, however, the net cost is only a small fraction of government guarantees and other financial sector support measures—which in some cases remain substantial.
15. Policy advice on exit balanced the strength of the recovery with possible sovereign risks. For instance, the Fund supported the United Kingdom‘s plans to frontload fiscal consolidation in 2010, while it advised the United States to maintain stimulus throughout 2010 and withdraw support in 2011 given differences in the assessment of the strength of the recovery and potential sovereign risks (Box 4). Risks are, however, of an evolving nature.
Did the Fund’s Advice on Stimulus Take Into Account Financial Sector Vulnerabilities?
This box looks at four countries where substantial implicit liabilities were created by the financial crisis and considers whether the fiscal advice has taken this threat into account. The evidence is that in the post-Lehman period, contingent fiscal sector liabilities were clearly flagged, though in a number of cases not explicitly gauged against the recommendation to engage in fiscal stimulus.
Article IV reports prepared prior to the onset of the crisis in August 2007 were sanguine about the risks that the financial sector could pose for fiscal sustainability. For example, the August 2007 Article IV report for Ireland noted that 'banks have large exposures to the property market, but stress tests suggest that cushions are adequate to cover a range of shocks‘.
Staff reports prepared between the onset of the crisis in August 2007 and the collapse of Lehman Brothers in September 2008 were rather cautious. In the July 2008 U.S. report, staff advised to 'avoid repeated generalized fiscal stimulus, and let the stimulus package work, with any further actions targeted at root problems in housing and banking‘. It took note of the exposure taken by the Fed as part of the Bear Stearns rescue operation, and advised that any further emergency asset operation should be made by the Treasury. The July 2008 U.K. report called for fiscal consolidation, not stimulus—at a minimum cumulative structural adjustment of 1 percent of GDP in 2009 and 2010. In the period between August 2007 and September 2008, no Article IV reports were prepared for Ireland or Spain, with delays likely reflecting the Fund‘s downsizing and departmental priorities combined with a sudden increase in workload.
The (post-Lehman) 2009 staff reports show a clear awareness of contingent fiscal liabilities stemming from the financial sector, though the link with fiscal policy advice was somewhat uneven.
In the Irish case, the May 2009 report noted that fiscal consolidation had begun, and that it would require a sustained effort. Public debt to be incurred to support the financial system, while uncertain, was estimated at around 12–15 percent of GDP. Staff supported the consolidation effort, while advising the authorities to guard against the risk that the taxpayer would bear a disproportionate burden of the costs of cleaning up the banks. In 2010, contingent financial sector liabilities turned into government capital transfers amounting to 25 percent of GDP, pushing the overall 2010 government deficit to 32 percent of GDP.
In the case of Spain, in a February 2009 report, staff‘s overall assessment was that a prolonged period of 'slow growth /high-unemployment equilibrium, from which lowering public debt would be difficult‘ was to be avoided. Staff 'agreed that while allowing automatic stabilizers to operate fully, fiscal policy needed to remain cautious given that some fiscal powder also should be kept dry, as a contingency, to assist banks with capital, if needed‘. The report noted that the debt implications of fiscal measures, credit lines and guarantees were large; the fiscal recommendation in the appraisal does not emphasize financial sector liabilities. ('Further fiscal impulse—only if necessary, and in cooperation with EU partners, or to assist banks—should be linked to structural reforms, to minimize their social costs‘).
The 2009 U.K. report welcomed unprecedented macroeconomic policies to support economic activity, while also noting that contingent liabilities from the financial sector were a major vulnerability—the report estimated the government‘s exposure to the financial sector (via various support measures) at 63 percent of GDP.
Finally, the July 2009 U.S. report welcomed the large post-Lehman monetary and fiscal stimulus and wide range of measures to restore financial stability, and noted that additional fiscal stimulus could be used. The financial rescue operations (including those accrued by the Fed) were flagged as a key fiscal risk.
The Fund’s Advice on Exits from Fiscal Stimulus: U.K. versus U.S.
Fund staff advocated substantial medium-term fiscal adjustments for both the United Kingdom and the United States. However, the Fund‘s advice on the timing of near-term fiscal exits in these countries diverged which likely resulted from differences in the assessment of: (i) tail risks associated with a loss of confidence in the sovereign; (ii) the degree of slack in the economy—the output gap in the U.K. was projected to be smaller than in the U.S. in the 2010 U.K. and the U.S. Article IV reports; and (iii) debt tolerance level— considerations that the U.S. is an issuer of the world‘s reserve currency and differences in the scale of possible contingent liabilities emanating from the banking sector.
In the 2010 U.K. Article IV report, Fund staff supported the government‘s frontloaded fiscal consolidation plans set out in the 2010 Budget to reduce the risk of a costly loss of confidence in public finances. Staff also concluded in the 2011 Article IV consultation that strong fiscal consolidation that is underway would be appropriate, taking into account that the deviations from the economic trajectory that had been forecasted were largely temporary. In the 2010 U.S. Article IV report, staff agreed with the U.S. authorities that stimulus should be maintained in 2010 while the then envisioned withdrawal in 2011 was appropriate. In December 2010, however, the US adopted a new stimulus package, the impact of which was considered small relative to its fiscal cost (January 2011 WEO Update), resulting in a change in the stance of fiscal policy, where the structural deficit in 2011 is now projected to widen rather than contract (April 2011 WEO). Staff advised the authorities in the 2011 Article IV consultation to start fiscal adjustment in FY2012 to guard against the risk of a disruptive loss in fiscal credibility and adopt a medium-term consolidation plan to stabilize the debt ratio by the middle of the decade and gradually reduce it afterwards.
During the 2010 Article IV consultation, the U.K. government emphasized the importance of ensuring debt sustainability to regain fiscal space to cope with future adverse shocks and demographic-related spending pressures, recognizing that most of the recent deterioration in fiscal deficits was structural. Staff supported the government‘s fiscal consolidation plans to balance the cyclically-adjusted current budget over a five-year rolling horizon—by 2015/16. Staff assessed in the 2010 Article IV report that "fiscal tightening will dampen but not stop growth as other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus." In its policy advice, staff also suggested key safeguards against uncertainty surrounding the cyclical outlook, including the free operation of automatic fiscal stabilizers in both directions, and temporary targeted tax cuts in the unexpected but possible case of a significant and prolonged downturn. Since then, although the country experienced unexpected weak economic growth and a rise in inflation, staff assessed that the deviations were largely temporary, concluding in the 2011 Article IV consultation that strong fiscal consolidation would remain essential to achieve a more sustainable budgetary position, thus reducing fiscal risks, while the current scale of monetary stimulus should be appropriate given fiscal adjustment and subdued wage growth. Staff again concurred in the 2011 Article IV consultation that the authorities‘ planned medium-term fiscal consolidation was appropriate. This amounted to a structural adjustment of about 8.0 percentage points of GDP over a 5-year horizon.
In the case of the U.S., in July 2010, staff recommended maintaining fiscal stimulus in 2010 as planned given the remaining weakness in demand, stubbornly high unemployment, and lingering financial strains, and in 2011 to make the then planned down payment (about 2 percent of GDP) on fiscal consolidation with flexibility on the size of adjustment if risks materialize. No immediate concerns for possible loss of confidence in public finances were raised in the 2010 U.S. Article IV report from the authorities, owing to brisk demand for treasuries and low yields. Market concerns, however, have risen about the U.S. fiscal path since April 2011 given little evident progress in breaking the political stalemate over how to carry out needed fiscal consolidation. In the concluding statement of the 2011 Article IV mission in June 2011, staff warned about possible unfavorable fiscal outcomes that could take the form of a sudden increase in interest rates and/or a sovereign downgrade if an agreement on fiscal consolidation did not materialize or the debt ceiling was not raised soon enough. Staff recommended a broadly uniform reduction of the federal structural primary deficit over the next five years within a fully-specified and politically-backed consolidation plan. The total recommended reduction was 7½ percentage points of GDP or about 1½ percentage points per year.
VI. Coverage of Spillovers Related to Advice on Stimulus and Exit Policies
16. Multilateral surveillance products included explicit discussion of the spillover effects of stimulus and exit policies. For example, the 2009 Fiscal Monitor (SPN/09/21, 6/30/09) provided estimates of the impact of fiscal stimulus by G20 countries on non-G20 countries via increased import demand. The Spring and Fall 2010 WEOs stressed the negative spillover effects of the lack of medium-term exit strategies on world interest rates and of prolonged fiscal and monetary stimulus due to delays in the repair of the financial system. The Fall 2010 WEO argued that postponing fiscal consolidation in advanced economies would increase downside risks to the global economy. The Spring 2011 WEO presented analytical evidence suggesting that the net effect of advanced economies‘ monetary easing would not be detrimental, including for emerging or developing economies, provided it successfully stabilized output.
17. However, analysis and coverage of the outward spillovers of stimulus and exit policies of systemically important countries were uneven Staff recommended in the 2009 and 2010 Article IV consultations with China that the country‘s fiscal policies be reoriented from investment toward private consumption, including in view of its outward spillovers. The reports also argued against excessive monetary stimulus, in part to avoid exacerbating trade imbalances. There were also references to the impact of fiscal adjustment in Japan on the Asian region and of quantitative easing by the Bank of England on global equities in the respective staff reports. However, staff reports for the Euro Area (2009 and 2010) were silent on the outward spillover effects of member countries‘ fiscal consolidation strategy. The 2009 and 2010 Article IV staff reports for the United States argued that increased savings through fiscal consolidation would contribute to global rebalancing but did not discuss the external impact of its accommodative monetary policy (Box 5). With the new spillover reports, the discussion of the impact of domestic macroeconomic policies of the major economies on other members has become more prominent in the context of the 2011 Article IV consultations.
Coverage of US Monetary Policy Spillovers
Coverage and assessment of outward spillovers from the US monetary policy was uneven across different surveillance products. The 2010 U.S. Article IV report was silent on the external impact of continued extraordinary accommodative monetary policy in the U.S., e.g., the impact of capital flows from the U.S. to other economies―especially emerging market countries with rising interest rates―despite the red flags raised on this issue within the internal review process. The spring 2011 multilateral surveillance products (WEO and GFSR), however, covered this topic. Key messages included the following: (i) little evidence was found to support that cross-border flows surged due to quantitative easing in the large advanced economies (GFSR, April 2011, Chapter 1); (ii) as long as monetary policy in large advanced economies successfully stabilizes their domestic outputs, its outward spillovers to other economies will not be detrimental (WEO, April 2011, Chapter 1); and (iii) economies that have greater financial exposure to the U.S. are more sensitive to changes in the U.S. interest rates (WEO, April 2011, Chapter 4). The 2011 U.S. Article IV report, which incorporated the main messages of the accompanying spillover report, raised as a main risk a likely reversal of some of the inflows to emerging markets if markets were to suddenly bring forward expectations of monetary tightening, suggesting a premium on clear communication of monetary policy.
18. The broader country case study also shows that the analysis and coverage of inward and outward spillovers, as well as cross-country analysis was mixed. Only a few case study countries had substantive analysis of inward spillovers. Discussion of outward spillovers was also mixed. Where spillover analysis was done, these were mainly in the form of qualitative descriptions of potential channels for contagion. The coverage of cross-country analysis was also uneven, with only one instance in the case study where these were extensively discussed.
VII. Traction
19. The overall stance was in line with Fund recommendations. In response to the economic slowdown, a majority of advanced and emerging market countries started loosening policies in 2008, pursued further expansionary policies in 2009, and exited from these measures at different speeds in 2010 and 2011 (Figure 2) as global growth picked up. In LICs, the countercyclical policy response that was implemented in 2009 was a first, with LICs with stronger pre-crisis buffers making greater use of countercyclical fiscal policy.5
Stances of Macroeconomic Policies
Citation: Policy Papers 2011, 066; 10.5089/9781498338561.007.A003
1. Blue: AMs, Red: EMs. LICs are not included due to a lackof data.2. Changes in policy rate and cyclically-adjusted primary balance in year tfrom year t-1 show changes in stances of monetary and fiscal policy, respectively.3. Policy rates in 2011 are average from January 2011 to the latest month. Others are based on projections as of 2011 Spring WEO.Relationship Between Key Macroeconomic Policy Variables and Policy Space
Citation: Policy Papers 2011, 066; 10.5089/9781498338561.007.A003
1. Blue: AMs, Red: EMs. LICs are not included due to a lack of data.2. Changes in policy rate and cyclically-adjusted primary balance show changes instances of monetary and fiscal policy, respectively. Inflation rate is defined as deviation of 2007 CPI inflation from its historical average as of during 2005–10.3. Projections are based on 2011 Spring WEO.20. The link between the worsening in the estimated cyclically-adjusted primary balance and fiscal space, on one side, and the reduction in short term interest rates and pre-crisis inflationary pressures on the other side, was tenuous (Figure 3).6 However, this does not imply that countries did not follow Fund‘s advice, as this may be due to a variety of factors. In particular, discretionary policy action explains only part of the worsening in the estimated cyclically-adjusted primary balance—in a situation where elasticities of revenues to GDP fall. In addition, estimates used in these regressions for the policy variables and policy space are ex post measures, that may have differed from how authorities, and the Fund, measured them at the time policy decisions were taken. Finally, pre-crisis inflation was high in a number of countries but as inflationary pressures abated, interest rates were driven to their lower bound in a number of economies—consistently with indications that would have been given by Taylor-type rules becoming consistent with negative interest rates.
21. There were however instances where staff and authorities disagreed on staff’s advice on stimulus and exit policies. This occurred in a number of countries in the case study (5/12). Examples of disagreements involved the timing of monetary tightening, the pace of adjustment in the fiscal policy stance, and measures to strengthen fiscal frameworks to support the credibility of consolidation efforts. The Article IV review separately found that when there were disagreements with the authorities on the Fund‘s advice, including on fiscal and monetary policies, these were usually clearly explained. For example, in the 2008 Article IV report on the Euro Area, staff recommended that monetary policy rates continue to be kept on hold, while the authorities were in favor of tightening due to upside risks to inflation. The ECB eventually tightened policy rates in July 2008. The 2009 Article IV report for Ireland signaled differences in opinion on the pace of needed medium-term expenditure consolidation and on revenue forecasts, with the staff‘s baseline reflecting stronger consolidation and more pessimistic revenue projections. The 2010 Article IV report on Spain noted disagreements about the need to introduce an independent fiscal council to bolster the credibility of fiscal policy.
Prepared by Gilda Fernandez, Toshiyuki Miyoshi, Kingsley Obiora, Hitoshi Sasaki, and Bert van Selm.
Also referred to as Staff Discussion Notes.
April 2008 and April 2010 WEO, Staff Position Note The Case for Global Fiscal Stimulus (March 2009).
The policy response in LICs is discussed in detail in Emerging from the Crisis—Macroeconomic Challenges Facing Low-Income Countries.
Different specifications (e.g., taking into account the change in the cyclically-adjusted primary balance from 2007 to its trough, with debt-to-GDP ratios and the output gap to adjust for countries‘ initial cyclical positions as explanatory variables) yielded similar results.
