Front Matter Page
IMF MULTILATERAL POLICY ISSUES REPORT
2014 SPILLOVER REPORT
July 29, 2014
IMF staff regularly produces papers covering multilateral issues and cross-country analyses. The following document has been released and is included in this package:
The Staff Report on the 2014 Spillover Report, prepared by IMF staff and completed on June 25, 2014 for the Executive Board’s consideration on July 7, 2014.
The Executive Board met in an informal session, and no decisions were taken at this meeting.
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Front Matter Page
2014 SPILLOVER REPORT
June 25, 2014
Executive Summary
Global spillovers have entered a new phase. With crisis-related spillovers and risks fading, changing growth patterns are the main source of spillovers in the global economy at this juncture. Two key trends are highly relevant here. First, signs of self-sustaining recovery in some advanced economies indicate that the unwinding of exceptional monetary accommodation will proceed and lead to a tightening of global financial conditions in the coming years. An uneven recovery, though, suggests normalization will proceed at different times in different countries, with possible spillover implications. Second, growth in emerging markets is slowing on a broad basis since its precrisis peak and can carry noticeable spillover effects at the global level.
Recovery and normalization of monetary policies in key advanced economies will have global spillovers. Led by the United States and the United Kingdom, higher benchmark interest rates will imply higher interest rates globally. The nature of spillovers related to prospective unwinding, however, will depend on the main underlying drivers of higher yields—for example, stronger growth versus unexpected monetary tightening. Policy and communication challenges stemming from normalization are more complex now than in past tightening cycles, given an unconventional starting point with policy rates near zero and large central bank balance sheets. Effects on spillover-recipient countries will depend on the extent of their vulnerabilities as well as on the smoothness of the normalization process. As accommodation is removed, spillover implications for financial sector reform will also become more apparent going forward.
Slower growth in emerging markets can have sizable spillovers on the rest of the world through diverse channels. A gradual, synchronized, and protracted slowdown will likely weigh on global growth through trade as well as finance. With rising cross-border bank claims on emerging markets, a protracted slowdown could also lead to noticeable capital losses for banks in advanced economies exposed to these borrowers. In commodity markets, slower growth could translate into lower commodity prices, which would play a stabilizing role at the global level, but have far-reaching distributional consequences on advanced, emerging and developing economies through changing terms of trade. Given stronger regional integration—including through foreign direct investment and remittances, a slowdown can be a significant source of local spillovers on neighbors through added channels.
Key spillover risks can intersect and interact with each other. With regard to monetary spillovers, much will depend on how well the normalization process can be managed in major advanced economies and on policy frameworks in recipient economies. Likewise, spillovers from emerging market economies will depend on the depth and nature of their slowdowns. The two risks can be interrelated because markets may reassess growth prospects in emerging markets amid renewed bouts of financial turbulence and capital outflows. A downside scenario of sharply tighter financial conditions alongside a further weakening of emerging market growth would be damaging for the global economy—lowering output by about 2 percent.
Spillover risks warrant stronger policy action at both the national and global levels. Stronger actions at the national level in both source and recipient countries of spillovers would align with better outcomes at the global level. With incentive problems and tradeoffs, however, stronger national actions alone may not be sufficient to address spillover consequences, and collaboration takes on renewed importance in mitigating or insuring against potential downside risks and providing support for more vulnerable economies, if certain key risks were to materialize.
Approved By Hamid Faruqee
Prepared by an interdepartmental taskforce comprising as principals: Hamid Faruqee, Ayhan Kose (Co-Chair) and Emil Stavrev (all RES), James Morsink and Ratna Sahay (MCM), Vikram Haksar and Papa N’Diaye (SPR), Steven Barnett, Stephan Danninger, and Isabelle Mateos y Lago (all APD), Petya Koeva Brooks and Krishna Srinivasan (EUR), Julio Escolano (FAD), Roberto Cardarelli and Nigel Chalk (WHD), and coordinated by Hamid Faruqee (Taskforce Chair). Analysis was provided by the interdepartmental spillover teams as follows: Overview chapter led by Hamid Faruqee, Ayhan Kose, and Emil Stavrev, including Rabah Arezki, Ben Hunt, Mika Kortelainen, Akito Matsumoto, Dirk Muir, Susanna Mursula, and Juan Francisco Yepez Albornoz (all RES), Plamen Kostadinov Iossifov (EUR), Nicolas Blancher, Allison Holland and Ceyla Pazarbasioglu (MCM), Francis Vitek and Kevin Wiseman (SPR); Emerging market chapter led by Rabah Arezki and Sweta Saxena, including Eugenio Cerutti, Ben Hunt, Dirk Muir, Carolina Osorio Buitron, Marina Vladimirovna Rousset, Inyoung Song, and Hongyan Zhao (all RES), Srobona Mitra (MCM), Waikei Raphael Lam and Wojciech Maliszewski (APD), Luis Cubeddu, Alexander Culiuc, Ceyda Oner, Marijn Willem Otte, Michele Ruta, Silvia Sgherri, and Evridiki Tsounta (all SPR), Valerie Cerra, Herman Kamil, Pablo Hernan Morra, Sebastian Sosa, and Fabian Valencia (all WHD), Alberto Behar, Padamja Khandelwal, Malika Pant (MCD), Jesus Gonzalez-Garcia and Juan Trevino (AFR); Monetary policy chapter led by Esteban Vesperoni and Sebastian Weber, including Chanpheng Fizzarotti, Ava Yeabin Hong, Ben Hunt, Mika Kortelainen, Dirk Muir, and Susanna Mursula (all RES), Jorge Canales Kriljenko (AFR), Joong Shik Kang (APD), Ali Jawad Al-Eyd, Pelin Berkmen, Jiaqian Chen, Alasdair Scott, and Tao Wu (all EUR), Christina Kolerus and Constant Aime Lonkeng Ngouana (FAD), Padamja Khandelwal, Pedro Rodriguez, and Natalia Tamirisa (all MCD), Tommaso Mancini Griffoli and Prachi Mishra (MCM), Papa N’Diaye, Silvia Sgherri, and Francis Vitek (all SPR), Troy Matheson, Andre Meier, and Jarkko Turunen (all WHD).
Contents
EXECUTIVE SUMMARY
GLOSSARY
CHAPTER 1. CHANGING TIDES AND GLOBAL SPILLOVERS
A. Global Baseline and Spillovers
B. Global Spillover Risks
C. Spillovers from Advanced Economies
D. Spillovers from Emerging Market Economies
E. Downside Scenario
F. Policies and Collaboration
BOXES
1. Risks and Spillovers from Low Inflation in Japan and the Euro Area
2. Spillovers from Financial Regulatory Reforms in Major Advanced Economies
3. Spillovers from Geopolitical Tensions in Russia and Ukraine
4. What Goes Around Comes Around: Spillbacks from Emerging to Advanced Economies
FIGURES
1. Changing Growth Dynamics and Tightening Financial Conditions
2. Global Downside Scenario
3. Simulated Output Effect in 2015
CHAPTER 2. SPILLOVERS FROM UNWINDING MONETARY SUPPORT IN ADVANCED ECONOMIES
INTRODUCTION
RECENT DEVELOPMENTS AND STYLIZED FACTS
A. The Taper Episode: Lessons Going Forward
B. Spillovers
SHOCKS, TRANSMISSION CHANNELS, AND SPILLOVERS
A. Drivers of Yield Increases
B. Spillover from Yield Increases
C. The Role of Local Transmitters
SCENARIO ANALYSIS AND POLICY IMPLICATIONS
A. Scenario Analysis
B. Main Policy Findings
C. Concluding Remarks
BOXES
1. The Effect of Global Financial Conditions on Sub-Saharan Africa Frontier Markets
2. Monetary Normalization Scenarios: G40 Model Simulation Results
3. Normalization of Monetary Policy in the United States
4. Public Debt Dynamics and Fiscal Stress in Emerging Market Economies
5. Spillovers from Portfolio Rebalancing in Japan
FIGURES
1. Drivers of U.S. 10-year Treasury Bond Yield
2. Drivers of S4 10-year Bond Yields
3. Spillovers to Emerging Market Economies from S4 Shocks
4. Effect of Fundamentals on Emerging Market Bond Yields, Two-day Change
5. Average Response of Emerging Market Economies to S4 Money Shocks
6. Taper and Quantitative Easing Yield Change in the United States and Its Spillover to Emerging Markets
7. Scenario 1: Faster US and UK Recovery
8. Scenario 2: Term Premium Shock and Misperceptions
9. Restricted Policy Response
10. Financial Stress in Emerging Market Economies over Tightening Cycles
CHAPTER 3. SPILLOVERS FROM A POTENTIAL REVERSAL OF FORTUNE IN EMERGING MARKET ECONOMIES
INTRODUCTION
PROPERTIES OF THE SLOWDOWN
GROWTH SPILLOVERS: ESTIMATES OF OVERALL IMPACT
CHANNELS OF SPILLOVERS
A. Spillovers through Trade
B. Spillovers through Commodity Prices
C. Spillovers through the Global Financial System
SPILLOVERS THROUGH “NEIGHBORHOOD” EFFECTS
RISKS AND POLICIES
A. Scenario Analysis
B. Risks and Policy
BOXES
1. Fiscal Implications of Oil Price Declines for Middle East Oil Exporters
2. Estimating Effects of a Slowdown in Emerging Market Economies on Sub-Saharan Africa
3. Hedging the Impact of Oil Prices on Public Finances: The Case of Mexico
4. Saudi Arabia’s Role in Stabilizing the Global Oil Market
5. Intraregional Spillovers from China
6. Intraregional Spillovers from Brazil through Trade
7. Potential Spillovers from Venezuela’s Regional Cooperation Agreements
8. Potential Spillovers from Remittances from the Cooperation Council for the Arab States of the Gulf (GCC) and Russia
FIGURES
1. Emerging Market Economies: Growing Role in the World Economy
2. Properties of the Slowdown in Emerging Market Economies
3. Emerging Market Economies: Evolution of Growth
4. Emerging Market Economies: Evolution of TFP Growth
5. Cumulative Effect of a 1 Percentage-Point Growth Shock after Four Quarters
6. Cumulative Effect of a 1 Percentage-Point Growth Shock in Emerging Market Economies
7. Spillovers through Trade and Commodity Prices
8. Change in Trade Balance
9. Spillovers from Bank Linkages
10. Spillovers through the Banking Channel: The Mechanics
11. Bank Losses under Stress Scenarios
12. AEs: 2012 FDI and Portfolio Equity Position in EMs
13. AEs: 2012 Portfolio Debt Position in EMs
14. Stock Market Index Performance
15. EMs Intraregional Trade
16. External Financing from Venezuela
17. Remittances from BRIS, by Destination
18. Emerging Market Economies Spillover Scenarios
ANNEXES
Chapter 1
I. Framework for Global Downside Scenario
Chapter 2
II. Spillovers
III. Forward Guidance in Key Advanced Economies
IV. Spillovers and Fundamentals
V. Decomposing Long-term Rates with a Vector Autoregression Using Sign Restrictions
VI. Money, Activity, and Risk-On/Off Drivers of U.S. Yields and their Spillovers
Chapter 3
VII. Alternative Structural Decomposition
VIII. Gross Trade versus Value-Added Trade Flows
IX. Global Vector Autoregression Model
X. Emerging Market Economy Spillover through Oil Prices Using the FAVAR Model
REFERENCES
Chapter 1
Chapter 2
Chapter 3
Glossary
| AEs |
advanced economies |
| BRICS |
Brazil, Russia, India, China, and South Africa |
| CCPs |
central counterparties |
| CESEE |
Central, Eastern, and Southeastern European |
| CPI |
consumer price index |
| DAG |
directed acyclic graphs |
| DV |
domestic value |
| EMs |
emerging markets |
| ETFs |
exchange-traded funds |
| EUROMOD |
Euro Area Model |
| FAVARs |
factor augmented VARs |
| FDI |
foreign direct investment |
| FSGM |
Flexible System of Global Models |
| FV |
foreign value |
| GCC |
Cooperation Council of the Arab States of the Gulf |
| GDP |
gross domestic product |
| GPM |
Global Projection Model |
| GVAR |
global vector autoregression |
| LHS |
left hand side |
| LICs |
low-income countries |
| LOLR |
lender of last resort |
| OECD |
Organisation for Economic Co-operation and Development |
| RHS |
right hand side |
| RoW |
rest of the world |
| S4 |
Systemic 4: Euro Area, Japan, United Kingdom, and United States |
| SEFs |
swap execution facilities |
| SME |
small and medium-sized enterprises |
| UMP |
unconventional monetary policy |
| VAR |
vector autoregression |
| WEO |
World Economic Outlook |
| ZLB |
zero lower bound |