2014 Triennial Surveillance Review - External Study - Integrating Bilateral and Multilateral Surveillance on a Continuing Basis

2014 Triennial Surveillance Review - External Study - Integrating Bilateral and Multilateral Surveillance on a Continuing Basis


2014 Triennial Surveillance Review - External Study - Integrating Bilateral and Multilateral Surveillance on a Continuing Basis


1. This short paper examines how the Fund has fulfilled its bilateral and multilateral surveillance with respect to four key issues that have faced the global economy over the past couple years: (1) The U.S. Federal Reserve’s “taper” and the buildup in large-scale asset purchases that came before it, (2) Japan’s ambitious economic strategy launched in April 2013 by newly elected Prime Minister Abe, (3) Rising recognition that even though the central scenario of Chinese growth continues to be a gradual slowdown to a more inclusive and sustainable growth paths, there is at least some risk of a hard landing that could have major implications not only for China but for the entire global economy, and (4) Germany’s fiscal policy and the Euro-area crisis.3

2. Formally, the note here is an input to the IMF’s 2014 Triennial Surveillance Review. The idea is that by looking at a few key issues the Fund has faced recently, one will gain insights into how effectively the IMF is integrating its multilateral and bilateral surveillance. More broadly, the aim is to deepen understanding of (1) to what extent are multilateral and bilateral surveillance mutually informative and reinforcing? (2) How well are new potential global spillovers being identified, how quickly are the issues being integrated into surveillance, and is the Fund’s messaging consistent across modalities? and (3) how well are risks to financial stability being integrated into Fund surveillance? Needless to say, one cannot begin to catalog the Fund’s surveillance activities in a brief note, much less discuss them in detail.

The Fund’s Surveillance Product Cycle

3. Figures 1 and 2 give an overview of the Fund’s multilateral surveillance products, which have expanded considerably over the past fifteen years. The Fund’s bilateral surveillance is conducted primarily through so-called Article IV consultations.4 Since 2011, the outward spillovers from five systemically important regions (the U.S., the UK, the Euro Area, Japan and China) are examined in their Article IV reports on an annual basis. The World Economic Outlook (WEO) is, of course, the Fund’s longest-standing multilateral surveillance product. It was supplemented beginning in 2002 by the Global Financial Stability Report, and more recently by the Fiscal Monitor. In addition to these reports, the Fund now produces regional surveillance reports, and twice a year there are off-peak updates to the WEO. Figure 1, however, lists several other modalities. These are described in Box 1 below.

Figure 1.
Figure 1.

Multilateral Surveillance Product Timeline

Citation: Policy Papers 2014, 061; 10.5089/9781498342988.007.A001

Figure 2.
Figure 2.

Timeline—IMF Surveillance Process

Citation: Policy Papers 2014, 061; 10.5089/9781498342988.007.A001

Newer Modalities of Multilateral Surveillance at the Fund

Integrated Surveillance Decision (ISD). The Fund adopted an Integrated Surveillance Decision in 2012. According to that decision, in addition to assessing the contribution of members’ policies to their domestic and balance of payments stability, Article IV consultations should cover potential or actual outward spillovers from members’ policies that may significantly influence the effective operation of the international monetary system. Although technically a revision to the Fund’s legal framework rather than a surveillance modality, the ISD is important because it clarifies the IMF’s ability to use Article IV consultations to discuss policy spillovers from member countries onto global stability.

Spillover Reports (IMF publication). These reports assess how policies in the large systemic-five economies (China, Euro Area, Japan, UK and U.S.), impact the rest of the world, given the large volume of trade and financial linkages in the global economy. They were launched in 2011.

Pilot External Sector Reports (IMF publication). These new and ambitious reports, launched in 2012, aim to provide more effective surveillance of external imbalances by broadening the Fund’s earlier assessment of exchange rate exercises to look more systematically at current accounts, balance sheet positions, reserves adequacy, capital flows, and capital flow measures. (The earlier exercise looked mainly at exchange rate misalignments, and did not give nearly as much emphasis to financial sector issues.) In principle, these reports provide a snapshot of multilaterally consistent analysis for the external positions of the 28 largest economies (and the Euro Area) simultaneously, and point to potential policy responses.

Early Warning Exercise (confidential presentation to the International Monetary and Financial Committee). This exercise assesses low-probability but high-impact risks to the global economy and identifies policies to mitigate them. It integrates macroeconomic and financial perspectives on systemic risks, drawing on a range of quantitative tools and broad-based consultations. It is a joint IMF and Financial Stability Board (FSB) exercise, launched in 2008.

Vulnerability Exercises (internal exercise). These exercises aim to provide a basis for regular, focused discussions on key risks and their implications for IMF policy, and policy prescriptions. Vulnerability exercises were first piloted in 2001 for emerging markets. They were extended to advanced economies in 2009 and to low-income countries in 2011. Given the country-specific nature of the results, the results inform the EWE but are not circulated to the IMF’s Board or FSB members.

WEMD. These are presentations to the IMF directors on world economic and market developments (WEMD). They are presented to the Board by the Economic and Financial Counselors.

4. The rationale for having far more frequent and comprehensive reports is clear: it allows members to have much more frequent and timely information. The expanding number of products has also been intended, of course, to fill in perceived gaps in the surveillance toolkit. Of course, the proliferation of reports does risk stretching staff thin, both with producing the reports and the many related meetings. The burden on staff resources and the tradeoffs involved in producing so many products, particularly some of the new post-2010 exercises, is a question worth revisiting as the global financial crisis abates, but it is not our purpose to take it up here. However, we reiterate the point that messaging involves emphasis and communication, and not just an extensive cataloguing of risks. We will return to the issue of proliferation and communication in a final section.

5. Summary: As is apparent from Figure 1, the IMF’s surveillance process is multidimensional, multifaceted and constantly in motion. Different modalities bring different perspectives to complex problems. Given the inherent difficulties in forecasting and assessing economic risks, difficulties experienced by even the best central banks and the best outside forecasters, the IMF faces the difficult challenge of balancing “Type I” and “Type II” error in its risk assessments. That is, it wants to correctly warn of high-risk, high-cost problems without too often warning of low-probability, relatively mild problems. Constantly changing risk assessments and different approaches naturally yield different results with the IMF’s main challenge being to effectively communicate and interpret its analysis.

The Taper

6. Since the onset of the global financial crisis, few policies have caused such controversy as the U.S. Federal Reserve’s policy of quantitative easing with its concomitant effects on emerging markets and exchange rates. The issues raised are at the heart of Fund surveillance activities, at both the national and multilateral levels.

A. Overview of Quantitative Easing

7. Though of profound importance, the issues raised by quantitative easing are also profoundly complex. The economic theory underlying the effects of quantitative easing is far less developed than the theory of conventional monetary policy, and the empirical evidence is thin. It is complex because, technically, quantitative easing expands the money supply, but when interest rates are zero, it can equivalently be viewed as expanding the supply of short-term debt. Indeed, if one recognizes that the government ultimately owns the central bank and its balance sheet, it is not immediately obvious why quantitative easing policy is any different from normal maturity transformation operations. From the perspective of its own integrated balance sheet and the assets held by the private sector, the U.S. government could achieve a similar effect to quantitative easing by having the Treasury issue more very-short-term debt and less long-term debt. A straightforward shortening of maturity structure would likely have been far less controversial. Of course, precisely because of different private sector perceptions, and the critical role of expectations in the transmission of monetary policy, the effects might have been very different also.

8. The claims by emerging markets that QE policies have had big effects on exchange rates and capital flows are even more difficult to disentangle. The fact that most emerging markets recovered far more quickly than advanced countries from the global financial crisis would have induced capital inflows and placed upward pressure on their exchange rates even absent ultra-loose advanced country monetary policy. Even if advanced countries had simply maintained zero interest rates and never gone the extra step of quantitative easing, emerging market economies would have experienced strong pressures from global investors. This is not to dismiss the concerns of emerging market policymakers; anecdotal evidence indeed suggests that quantitative easing policies did have effects on the timing, rhythm and intensity of capital market pressures.

9. The response of advanced economy monetary authorities, and of the U.S. Federal Reserve in particular, to emerging market concerns was to point out the weak post-financial crisis recovery that the advanced economies were experiencing, and to suggest that efforts to energize their recoveries were very much in the interest of emerging markets. How did the Fund assess these tensions and issues?

B. The Fund’s Surveillance of Quantitative Easing

10. Table 1a lists some of the Fund’s key publications on quantitative easing, tracing back to its policy paper, already in mid-2010, on exit strategies from crisis interventions, written of course long before the Fed launched QE III in September 2012 or began to discuss tapering in May 2013.5 Most of the Fund’s more formal analysis of unconventional monetary policies begins in 2012, in parallel with when academics also began to first process the experience. Notable is the April 11, 2012, report produced for the G-20 ministers, which discusses the possibility that unconventional monetary policies might lead to excessive capital inflows into emerging markets and to mispricing of assets. The report concludes that in fact a variety of push and pull factors were inducing flows into emerging markets (e.g., higher growth in emerging markets, lingering risks in advanced economies).

Table 1a.

Unconventional Monetary Policies

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11. In a March 2013 report prepared by the research department for the Fund’s internal surveillance committee, Fund economists emphasize that the Fed’s large balance sheet may lead to greater asset volatility during an exit. Also important is the April 2013 Global Financial Stability Report (GFSR), and related research papers, which highlighted another risk to the Fed’s QE policy. The GFSR argued that prolonged ultra-easy monetary policy raised medium-term risks by making it easier for banks to defer repair of their balance sheets, and it warned especially of significant risks of policy strains in emerging markets during the exit phase. Needless to say, these reports and memoranda proved highly prescient when the United States Federal Reserve first began to publicly entertain the idea of tapering in May 2013.

12. The Fed taper of course caused huge strains on emerging markets, perhaps even more than had been anticipated in the IMF reports. It is difficult to sort out the causes and effects, which economists continue to work on, especially as around the same time, there began to be heightened concern about a slowdown of growth in China. The IMF Spillover Report (internally circulated July 2, 2013, externally circulated August 1, 2013) tried to put some perspective on the issues. It contained a broad discussion of the global benefits of QE, as well as the risks posed by a continuing exit. The document offers a high-end estimate of the positive effects of QE, arguing it may have lowered global long-term interest rates by over 100 basis points, and may have added as much as 1 percent cumulatively to global growth. These estimates, of course, could be used to provide support for the advanced economy contention that overall the effects of QE have been beneficial to emerging markets, despite concerns about exchange rate misalignments and capital flows. A number of further documents, highlighted in the table, expand on the view that QE policies supported growth during the early implementation phase, but have created risks of volatility on exit.

13. The above discussions were all part of multilateral surveillance products. What of the Article IV reports on the United States, for example in July 2012 and July 2013? The bilateral reports included analysis of the risks of QE withdrawal albeit the focus was perhaps less central than in some other multilateral reports. The Article IV reports generally accepted the view of the United States’ authorities that they possessed an adequate range of tools to handle the problems on the domestic economy, though noting the inevitable uncertainties due to QE’s experimental nature. The Fund generally accepts the Fed’s insistence that its mandate forced it to concentrate on U.S. inflation and employment outcomes, but this issue certainly merits further discussion in a dollar-centric world where Fed policy has such a profound and dominant effect on global financial markets. Both the Article IV report and the multilateral surveillance products (for example the World Economic Outlook) highlighted the risks of overly rapid fiscal tightening, or worse yet, U.S. government shut-downs and threats of debt default. It is notable, however, that neither modality gives as much attention to the need for structural reform in the United States (for example tax reform) as the IMF has tended to emphasize for other regions (for example, Europe, China, Japan).

14. Perhaps the most sensitive issue for national authorities is how the Fund translated its multilateral analysis into real-time bilateral commentary and advice, particularly for emerging markets that experienced strain as QE was withdrawn. The Fund certainly began to address the issue across many of its members after the initial strains of summer 2013. Risks posed by an eventual end to unconventional monetary policies in advanced countries start to be mentioned in several Article IV reports for emerging markets, with the tone sharpening further by February 2014. See Table 1b for a sampling of Article IV reports for emerging markets that note the high risk posed by the U.S. monetary policy tightening cycle.

Table 1b.

Unconventional Monetary Policies

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15. The debate surrounding the sensitive issue of Fed tapering deals not only with the Fund’s official staff publications and exercises but its broader communications strategies. Some countries have complained that the Fund was too quick to shift to assess the summer 2013 strains as a “crisis” when in fact the nature of the problem was quite diverse across countries. For example, Indian authorities might have argued that, with significant capital controls, a flexible exchange rate, and almost three hundred billion dollars in reserves, their country cannot be said to be vulnerable to a classic 1990s fixed exchange rate run. Equity flows and flexible exchange rates are shock-absorbing buffers, not necessarily trigger points. The semantics here are important and difficult to nuance precisely. It would probably have been more accurate to say India was suffering from twin problems of low growth and high inflation (stagflation), and the sharp exchange rate movements after the Fed taper were potentially destabilizing to fiscal policy, especially given fuel subsidies. The Fund’s general analysis that some emerging markets were facing broader problems than simply the Fed taper was correct, as ultimately underscored by a second bout of uncertainty starting in January 2014. However, more might have been done to communicate the nature of the problems and to differentiate across countries, and the Fund arguably did a much better job of this during the second round in January 2014.

16. Messaging and communication are extremely subtle issues, and the main thing one can ask is that the Fund maintain the discipline of always going back to the core findings of its research and surveillance exercises, which in the end it has largely done. There are of course still huge uncertainties hanging over advanced country exit from stimulus, and these remain ongoing concerns.

17. If there is a more trenchant lasting question from this episode, it is whether the Fund is too deferential to the analysis and position of the U.S. Federal Reserve. On the one hand, the Fed’s analysis is generally of a very high standard, but on the other hand it represents a much narrower set of interests than the Fund’s economists are charged with serving. Also, even if the U.S. Federal Reserve has substantial independence, the Fund should always be evaluating the Fed’s policies as part of the United States’ overall policy stance. On this score, the Fund should be given credit especially for underscoring the risks posed by the paralysis the United States has experienced in executing fiscal policy (advice that if taken, might have tempered the uncertainties caused by QE). On the other hand, the Fund has not been as consistent in pushing for badly needed structural reforms, for example to the U.S. tax system. (Although the Fund has certainly noted the issue from time to time; the October 2013 Fiscal Monitor recommends simplifying the tax code and broadening the base.) As we shall see, the Fund has been very firm with China and Japan on the need for structural reform as part of an overall assessment of their policies, and it does no favors to the United States by not treating it fully in parallel. The risks posed by the tapering and by QE in general would have been lower if they had been part of a broader, better policy package from the United States.

18. One might argue, of course, that the U.S. is less in need of structural adjustment than many other countries, whereas exceptionally divisive political differences over U.S. fiscal policy have been transparently destructive. Nevertheless, an overemphasis on aggregate demand perhaps excessively downplays some of the longer-term secular problems the U.S. is facing due to rising competition from Asia, an aging workforce, and growing inequality.


19. A second key issue facing the IMF recently has been Japan’s bold experiment with reflation. After his election in April 2013, Japan’s new prime minister pledged to bring inflation to a more normal level of 2 percent within two years, and to adopt fiscal policies and structural reforms to support the Bank of Japan’s efforts. Japan’s efforts are of utmost importance to the global economy, and therefore to the IMF membership for several reasons (aside from the obvious impact on Japan).

20. First, several major advanced economies, including the Euro Area, the United States and the United Kingdom, also find themselves in post-financial crisis liquidity traps. If Japan’s reflation proves a success, it will undoubtedly influence policymakers around the world. Second, one of the key initial impacts of Japan’s reflation has been a sharp drop in the value of the yen—from the formation of the Abe Cabinet on December 26, 2012 to March 7, 2014 the yen depreciated by 27 percent against the euro, 22 percent against the Korean won and 21 percent against the dollar. In the normal course of events, a radical change in policy that appeared to work mainly through currency depreciation would surely attract the Fund’s attention. Of course, as Japan is arguably following advice the Fund has been insisting on for over a decade, it is difficult for the IMF to be too critical. A third reason why Japan’s success is important is because a growing Japanese economy can help diversify Asian economies should China experience a slowdown.

21. The Fund’s advice to Japan has generally been quite consistent on the multilateral and bilateral levels. Some of the highlights are detailed in Table 2. For example, the 2013 Article IV emphasizes the importance of implementing all three arrows, particularly structural reforms and not just monetary expansion. In particular, the Article IV states that in order for Japan “to generate growth synergies, measures should include deregulation in agriculture and domestic services, lifting constraints to the provision of risk capital, reducing Japan’s excessive labor market duality, reforming the tax system to stimulate investment, and further relaxing immigration requirements to areas with labor shortages.” The World Economic Outlook has similarly regularly called attention to the importance of structural reform as a path to escaping from deflation.

Table 2.

Reflation in Japan/Abenomics

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22. The Fund has also expressed consistent concern over Japan’s long-term fiscal stability, and has taken the position of supporting plans to raise the consumption tax in 2014, albeit arguing that other temporary measures should be taken to ameliorate the growth impact. Per Table 2, the April 2011 Global Financial Stability Report underscored risks to Japan’s long-term budget stability, pointing to both risks to Japan and to broader global financial stability. In the April 2013 internal meeting on surveillance issues, Fund staff asked the question of what would happen to long-term interest rates under Abenomics. Japan faces a risk of a rise in nominal interest rates if inflation expectations rise, a risk of a rise in real interest rates if fiscal discipline is weakened, and a risk that interest rates would incorporate a larger risk premium if investors became uncertain of how policy would respond to these challenges. Of course, such volatility would likely have large global spillovers.

23. On the more immediate issue of yen exchange rate depreciation, the April 2013 spillovers report found relatively modest spillovers of Abenomics to other countries, though it is perhaps early to fully assess the effects of the yen’s sharp depreciation, for example on German and Korean manufacturers who compete with Japanese manufacturers. See Table 2 for further details on IMF reports on Japan. Note that the issue was also taken up in the 2013 Pilot External Sector Report (Box 2, “Impact of the Depreciation of the Yen on Other Currencies”). One might well ask why this issue did not receive even more attention, however, given that yen depreciation was one of the couple most dramatic developments in global asset markets in 2013.

24. Overall, Fund surveillance has raised more or less all the main issues on Japan, but two areas might be highlighted for discussion. First, although the Fund has rightly praised Japan’s efforts, it has perhaps downplayed the extent to which the initial success of Japan’s policies stemmed from a dramatic depreciation of the yen. In its multilateral surveillance role, the Fund might have been more forceful in insisting that Japan follow through on structural reforms to underpin long-run growth, and thereby help ensure that the net spillovers to the rest of the world are positive over the medium term. This issue is especially important given that Japan’s experience may prove a precedent for some other advanced countries, so the Fund needs to set a clear and consistent precedent. The 2013 Japan Article IV does address these concerns to some extent, largely arguing that the dramatic yen depreciation did not seem to have the large immediate impact some feared it might. The Article IV notes that sharp depreciation in the yen did not seem to carry a large trade balance impact, because it was counterbalanced by a rise in commodity prices, particularly energy imports. However, given the well-known lags in the transmission of exchange rate shocks to trade balances, it is far too soon to judge the effects, and of course Japan has had to pay much more for energy imports as it adjusts its energy policy after the Fukushima accident.

25. Second, despite the important warnings from the GFSR and the internal surveillance committee exercises, the Fund has arguably understated the global spillover risks from Japan’s unsustainable fiscal situation. This is a very difficult call for many reasons, but given the Fund’s clear concern over the risks posed by Japan’s fiscal situation; this might figure more prominently in the array of long-term global risk factors the Fund catalogues periodically in various modalities. The staff report for the 2013 China Article IV does obliquely note that a reappraisal of sovereign risk in Japan (and the U.S.) would have negative consequences for China. Given, however, how Japan has been at the leading edge of advanced country financial crisis, debt, and aging challenges, it is perhaps surprising that the corresponding spillover risks do not seem to be mentioned in other Article IV country reports as of February 2014.

Risks of a Hard Landing in China

26. China’s spectacular ascent in the world economy has been one of the dominant themes of the past three decades. China’s growth has not only lifted hundreds of millions of Chinese citizens out of poverty, but also propelled growth around the emerging world. China is now the world’s second largest economy, on track to eventually become the largest. At times in recent years, China has accounted for more than half of global GDP growth (using PPP measures). Its huge investment needs have helped propel a secular commodity price boom; its demand for capital equipment has also helped fuel growth in advanced economies such as Germany and Switzerland. Without question, China has had a huge impact across a broad range of markets and in manifold ways.

27. For some time, of course, many observers including the IMF have noted that China’s fast-growing economy suffers from myriad imbalances, and the question naturally arises whether there is a risk of a pause in fast growth. The IMF definitely has not viewed a Chinese hard landing as a central scenario, but given the enormous importance of China in the global economy, the Fund has increasingly begun to address the issue in recent years, both in external and internal exercises. The vulnerability of the global economy to an unexpected Chinese slowdown has been underscored by the January collapse in emerging market currencies and equities, a collapse driven in part by a recalibration of markets to the mere possibility that China might have a slowdown some day. Of the four topics discussed here, the Fund’s positions on China were until recently perhaps the least public and the least developed, though of course now risk of a Chinese hard landing has become a rising concern in global capital markets. Given the Fund’s central role in supporting global economic and financial stability, and given China’s preeminent role in the global economy, it is particularly interesting to understand how the Fund has approached the problem to date and, in keeping with the focus of this note, the consistency of its bilateral and multilateral surveillance. A listing of key highlights is given in Table 3a.

Table 3a.

Potential for Hard Landing in China

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28. A review of the Fund’s recent Article IV reports on China suggests that, by and large, the Fund has raised important macroeconomic issues in a clear and candid fashion, presumably in close cooperation with Chinese authorities. The 2013 Article IV report, for example, gives a sober assessment of the broad-based risks to the economy. It highlights, for example, how credit booms such as China’s recent one have very often had a large impact on public finances. The China Article IV points to potential problems in local government finances and in the shadow-banking sectors. It includes an explicit exercise of how a medium-term hard landing would affect the economy both under a reform and a no-reform scenario; the underlying exercise was issued as a working paper. In general, though cautious and sober and not aiming to create unnecessary noise, the IMFs 2013 Article IV report on China conveys reasonably significant and immediate concern over China’s economic growth path, especially should policy fail to adjust as needed. The question is whether this concern has been emphasized enough in bilateral advice to other countries that are particularly vulnerable to a slowdown in Chinese growth, or whether it has played enough of a role in multilateral surveillance.

29. The issue of a Chinese hard landing and its global effects are indeed taken up in the spillover reports and in a 2012 working paper. Substantively, many of the main issues are covered. Box 4.2 in the October 2012 World Economic Outlook considers in some detail the effects of a sharp slowdown in China, estimating that a 1 percent fall in China’s investment growth would lead to a 0.4 percent fall in growth in a country such as Chile that is heavily dependent on commodity exports, and smaller changes in diversified economies. This is an excellent and useful exercise, but it arguably understates the effects of a China slowdown by not fully incorporating other transmission channels such as instability in financial markets. The risk of a slowdown in China has also surfaced in many Article IV reports, particularly for commodity exports, and particularly since summer of 2013. Indeed, the risk of a China slowdown headlines the staff report for Australia’s 2013 Article IV consultations. Table 3b gives a sampling of Article IV reports that have incorporated risks of a Chinese hard landing to individual emerging markets.

Table 3b.

Potential for Hard Landing in China (Selected Article IV Reports)

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30. In general, the Fund has been actively engaged in studying the risks of a hard landing in China. However, the results have been arguably relegated to more technical papers and appendices, and have not received quite the prominence that, say, risks of a euro meltdown have received. So whereas the bilateral and multilateral surveillance have both covered key risks on China, they have perhaps understated the issue in communicating with national authorities outside of China. This communication problem will surely be rectified in coming months, now that growth risks to China have so clearly been a factor in recent emerging market economy turmoil.

German Fiscal Policy

31. The Eurozone has faced challenges of historic dimensions over the past several years, and it is not possible here to unpack all the myriad issues surrounding the Fund’s engagement with the euro crisis. Corresponding to the IMF’s significant commitment to Europe, the Fund has produced an impressive body of analysis covering Eurozone macroeconomic, regulatory, and financial issues, including spillovers, in its multilateral and Article IV surveillance activities. It is far beyond the scope of this short report to summarize the consistency of the IMF’s multilateral and bilateral surveillance of the Eurozone during the crisis. However, we will briefly take up the IMF’s analysis of German fiscal policy and its spillovers, as it has constituted a visible engagement between the IMF and another of its largest members. In particular, the IMF is sometimes viewed as having taken a strong stand on the need for Germany to engage in stronger countercyclical fiscal policy in order to serve as a locomotive to Europe’s economy and especially to the troubled Eurozone periphery. Is such a strong stand for greater German fiscal stimulus reflected in the IMF reports? Taking into account the 2012 and 2013 Article IV surveillance reports for the Eurozone and Germany, the surrounding material, and related multilateral surveillance reports, it does appear that the IMF did at the margin favor greater German fiscal stimulus. But the analyses are in general quite nuanced, and the views quite muted. Perhaps this outcome is consistent with the fact that the IMF’s own research pointed to relatively modest spillover effects from German fiscal policy to the rest of the Eurozone, and very limited effects to the periphery in particular. (See for example “Do Fiscal Spillovers Matter?” IMF working paper 11/211, September 2011, and Box 1 on p. 13 of the 2012 Article IV for Germany.) Importantly, the reports (particularly the 2013 Article IV report) do give a flavor of the great uncertainty and intense controversy over European fiscal policy in general and German fiscal policy in particular. One can presume that IMF’s policy stance was the outgrowth of especially intense internal debate, so it would be deeply misleading to suggest there is a single IMF view on the topic.

32. The 2013 Article IV report, written perhaps at the peak of debate over German fiscal stimulus, nevertheless does take a clear position: “The small projected loosening of the fiscal stance is appropriate and fiscal overperformance should firmly be avoided in the current growth environment.” As IMF Article IV reports go, this statement would appear to reflect a clear pro-fiscal bias. However, the 2013 Article IV report includes research suggesting that any spillover effects from German fiscal expansion were likely to be quite modest for the Eurozone as a whole and for the periphery countries in particular.6 And the report also places considerable emphasis on the need for structural reform to raise long-term growth, and places by far the greatest emphasis on the need for financial sector reform and banking integration, in order to “alleviate uncertainty and reduce downside risks.” Indeed, these and other reports prominently cite research suggesting (quite plausibly in this case) that policy uncertainty in Europe was likely a significant impediment to growth, including not only short-term policy uncertainty but long-term policy uncertainty on the pace of integration (or devolution) of the Eurozone.

33. Of course, the reports also place strong emphasis on headwinds posed by impairment of balance sheets across the Eurozone, including public, private and bank debt. (For example, Box 2 on page 10 of the 2013 euro area Policies report notes that when the public, households and corporate sectors all have high debt, the negative impact on growth is particularly significant.) And in contrast to any perception that the IMF single-mindedly advocated more expansionary fiscal policy, the IMF also gave great emphasis to the important stabilizing influence of strong German balance sheets on the rest of Europe. For example, p. 21 of the 2013 Article IV report for Germany notes how strong national balance sheets allow it to perform a stabilizing role for the rest of Europe. It is worth noting the contrast of the IMF’s advice with the case of the UK, where the IMF used the argument that impaired domestic balance sheets implied a higher fiscal multiplier because more households would be credit constrained.

34. Perhaps the IMF’s reputation for fiscal advocacy comes from multilateral surveillance reports such as the September 2013 paper “Reassessing Fiscal Policy,” which points to recent academic research suggesting that fiscal policy may be more effective when monetary policy is at the zero bound on interest rates. Again, however, this paper is quite nuanced in also emphasizing the risks of high public debt, and the importance of maintaining the ability to credibly backstop large private sector debts. Perhaps more directly contributing to the perception that the IMF favored much more aggressive fiscal policy are its Article IV reports for the UK, which strongly emphasized the importance of moderating fiscal retrenchment. This advocacy was particularly evident around the time of the April 2013 spring meetings of the IMF. The Fund, of course, later notably toned down its position as UK growth outperformed later in 2013. (Of course, the much greater openness of the UK economy compared to the U.S. economy might have suggested that the growth effects would be smaller, and the positive international spillover effects proportionately larger, than for a more closed economy like the United States, controlling of course for size.) Lastly, this paragraph would be incomplete without mentioning that in addition to the various reports covered in this review, the IMF’s position is sometimes defined by press interpretation of speeches by management. Some might argue that this is the case for German fiscal policy. Again, we emphasize the point that it is healthy for differences of interpretation to be expressed in different publications outlets, but communication should always acknowledge these internal differences and uncertainties where possible.

35. Table 4 lists some of the critical Article IV and multilateral surveillance reports dealing with German fiscal policy. Overall, the IMF advice appears to have been reasonably consistent across modalities, and by and large quite balanced though the huge political debate surrounding European policy may have at times exaggerated the extent to which the IMF actually engaged in strong advocacy of more proactive fiscal policy in Germany, as it clearly did in the case of the United Kingdom. The IMF certainly cannot be accused of taking a crude Keynesian view, given the considerable emphasis its reports gave to policy uncertainty, debt burdens, and the need for structural reform in Europe (particularly for a more complete banking union). Of course, given the contentious and polemic debate surrounding fiscal policy in Europe, and the press incentives for framing issues in political terms, it cannot be said that the IMF’s views on German fiscal policy were always represented accurately in the popular media.

Table 4.

German Fiscal Policy

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Resources and Traction

36. Although the main focus of this review is on the consistency of Fund surveillance between its bilateral and multilateral modalities, it would be difficult to conclude without commenting on the sea change that has taken place in the allocation of Fund time and resources, especially since the global financial crisis. Only a decade ago, the overwhelming proportion of Fund surveillance activities were concentrated on bilateral surveillance, particularly the Article IV country missions that are enshrined in the Fund’s articles of agreement. Multilateral surveillance played an important role, particularly through the analysis and views expressed in the Fund’s twice yearly World Economic Outlook. The WEO’s sister publication, the Global Financial Stability Report, had just recently been launched, and the Fiscal Monitor had not yet come into existence. Yet, by any accounting, multilateral surveillance occupied only a small fraction of staff time. Today multilateral surveillance activities, including many new products, have grown sharply, accounting for about 26 percent of total staff hours (excluding capacity building, see Table 5). There are many good reasons for this change. The global economy has become increasingly interconnected, with national policies having important spillover effects, especially the policies of large and systemically important economies. Indeed, this note has illustrated several examples.

Table 5.

The Share of Main Activities in Total Staff Years, FY07-FY14, (in percent)*

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The data presented in the table covers only the five area departments and selected functional departments (FAD, MCM, RES, SPR, and STA).


TSR staff team estimate. Value for Multilateral Surveillance in FY07 is estimated by adding 50 percent of staff time for TRS codes that would be best classified as research, analysis, policy development to Multilateral Surveillance as reported in TRS in that year. The other 50 percent is unallocated. Values for bilateral surveillance for FY07 are as reported in the TRS system, FY10 as converted to the TRACES structure, and FY14 as reported in TRACES.

37. Nevertheless, the proliferation of reports, some based on quite technical exercises, raises important communication challenges on several levels. In the “old days,” a decade ago, country authorities could expect a robust discussion and analysis surrounding the annual Article IV consultation. The World Economic Outlook and later the Global Financial Stability Report would weigh in with independent views, influenced by the bilateral discussions, and taking more complete account of cross-country issues and comparisons. Discussions and reports for program countries would, of course, often be more frequent.

38. Today, country authorities receive IMF views on an almost continual basis, sometimes filtered through quite complex modeling exercises. This raises two questions. First, is the IMF overloading its “bandwidth” with senior country authorities through a huge proliferation of information? During the immediate aftermath of the financial crisis, regular crisis updates and issue discussions were no doubt greatly appreciated. But this is not necessarily the case in calmer times. We leave that as an open question. Second, some of the new multilateral products require significant investment of time to absorb and assess, even for trained country economists. One might ask whether more effort needs to be expended on communicating results to research analysts in member central banks, finance ministries (and perhaps even in universities), as these are the ones most likely to be called upon to assess whether the most senior policymakers should devote time and attention to the results. This kind of communication could be facilitated either through staff missions, or perhaps conferences and programs at the IMF Institute. (The Global Financial Stability Report does have a few missions along these lines, but focused mainly on the GFSR, of course.) As things stand, this author’s assessment is that there is an oversupply of multilateral products, and an undersupply of communication modalities. The large and continual supply of products is one of the reasons why maintaining consistency has become more difficult in recent years. This is not simply a matter of adding micro blogs, but of more sharply differentiating products, and channeling communications accordingly. This is not an easy task, particularly in a world where all the best efforts at balanced communication strategies can be frustrated by disinformation promulgated in blogs and media. We might add that the Fund’s excellent working paper series plays an important role in underpinning Fund advice, analysis and credibility, and should be protected, if necessary by changing the imprimatur to more clearly delineate that these papers are essentially individual and not institutional products.


39. This study has looked at Fund surveillance through the lens of four important and topical issues: the Fed’s quantitative easing strategy and especially the taper, Abenomics in Japan, the risk of a hard landing in China, and the spillover effects of Germany’s fiscal policy. In all four cases, the Fund has provided its membership a useful and high-quality mixture of short-term conjunctural analysis and long-term policy research. The main challenge has been to calibrate an overall message on risk and concerns, both of individual regions and for the global economy as a whole. Overall, respecting the great difficulty in forecasting the global economy and global markets, the Fund’s performance has been good. However, there are some issues that merit attention, arguably leading to systemic mistakes that might be addressed in the future. First, on U.S. monetary policy, there is a tendency to defer to the Fed’s considerable expertise not only in making forecasts but in framing policy. The U.S. Fed is charged with representing U.S. interests, while the Fund’s staff is charged with overseeing the global economy. While the Fund was certainly right to be generally supportive of quantitative easing, and while it made some trenchant observations on the risks, it perhaps might have done more to put U.S. policy in international context. U.S. and global financial conditions did call for aggressive monetary easing. And the Fund was absolutely right to emphasize the importance of fiscal policy at the zero bound in supporting monetary policy. But it gave less emphasis to structural reform in the case of the United States than it did for Europe, China and Japan. The Fund did, of course, strongly emphasize that the U.S. needed to develop a more consistent and predictable fiscal policy framework, rather than lurching from debt limit debates to government shutdowns. And it did periodically raise the issue of tax reform, for example in the 2012 Article IV report. The issue of structural reform in the U.S. is important because, rather than simply downplaying emerging market concerns about downward pressures on the dollar, the Fund might have insisted more forcefully that the U.S. supplement its aggressive monetary policy with reforms to ensure that, over the medium term, the spillovers to emerging markets and the rest of the world would be positive. When it came to spillovers from the Fed’s tapering, the Fund had done good background analysis, but was perhaps slow to calibrate its message that different economies will be affected quite differently depending on policies and vulnerability. In early 2014, the Fund has now increasingly refined its approach.

40. The Fund has generally done well in the case of giving consistent policy advice to Japan and in its response to Abenomics, stressing all along the importance of structural reforms and giving extensive ideas in this dimension. The Fund also anticipated fiscal problems that might arise over time especially if Abenomics pushes up long-term interest rates, potentially causing significant fiscal duress. However, the Fund perhaps excessively downplayed the possible global spillovers from the sharp depreciation in the yen, and perhaps did not do enough to insist that “third arrow” reforms would not only help Japan in the long run, but also help give stronger justification to Japan’s policies from an international perspective, helping to ensure that the long-run spillovers would be positive, even if the initial sharp yen depreciation might cause short-run issues for some of Japan’s competitors. Perhaps even more importantly, the Fund has arguably downplayed the international spillover risks that will arise should interest rates in Japan begin to rise more quickly, either in response to rising inflation expectations, or if markets come to share the Fund’s concerns about the long-run sustainability of fiscal policy.

41. On China, the Fund has been quite candid about risks to China in many of its Article IV reports. In its multilateral surveillance, however, it has perhaps not done enough to highlight risks to the many countries that have become very dependent on continuous high growth in China. Indeed, good discussion of the risks can be found sprinkled throughout multilateral products and exercises, but often these discussions are found mainly in more technical chapters and reports. It is understandable that the Fund does not want to ruffle feathers by seemingly needless alarmism, but at the same time China has simply become too important in the global economy to downplay the effect its economic cycles might have.

42. On the Fund’s advice on German fiscal policy, the long trail of Article IV and multilateral surveillance products suggests that the Fund’s advice was quite nuanced, far more so than is sometimes portrayed. The Fund certainly did not strongly endorse the view that German fiscal policy expansion would have large spillover effects to the rest of the Eurozone, and at the same time it did emphasize how strong German balance sheets helped perform a stabilizing role in Europe. If one believes that the Fund should have pushed Germany much harder on fiscal expansion, then of course this would be another example of deference to a large member. My own assessment is that the Fund’s view on German fiscal policy as expressed in written reports was quite nuanced. One could argue that perhaps the Fund should have argued more forcefully for Germany to use its strong balance sheets to directly aid the highly indebted periphery countries, but there is no space to take up this issue systematically here.

43. In conclusion, over the four main issues studied here, the Fund by and large did a good job of blending viewpoints and making its bilateral and multilateral messaging consistent. The Fund has been right to offer different nuances in different reports, and to try to explain and clarify the main uncertainties. This tolerance of diversity is a strength that protects the Fund and its membership from sticking too long to old views that should be superseded by new ones. Nevertheless, despite this overall excellent performance, there is room for improvement, particularly in balancing the concerns of its largest members with the concerns of the membership as a whole.

44. The substantial increase in staff resources devoted to multilateral surveillance has helped sharpen the Fund’s insights on many systemic issues. But the corresponding massive proliferation of multilateral products also arguably crowds the Fund’s bandwidth in communications with its members, and makes maintaining message consistency more difficult. As the Fund continues to experiment with new products and modalities, it will need to be prepared to streamline as well as to enhance. At the same time, enhanced communication between Fund staff and technically-trained counterparts in member states will help policy authorities better absorb messages from some of the newer products.


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The study was completed in April 2014 (except for a few very minor subsequent edits), and takes into account information available up to that date.


Following the Integrated Surveillance Decision adopted in July 2012, Article IV consultations became a vehicle for bilateral and multilateral surveillance.


Table 1 does not include important research such as Blanchard’s (2010) analysis suggesting that a 2 percent inflation target may expose countries to high risk of hitting the zero bound on interest rates, and analyzing alternative, higher, target inflation rates.


The 2013 IMF Article IV for Germany contains an innovative device for expressing the complexity of some of the issues, by including a Q and A format in one section to cover responses to alternative viewpoints. This also helps to communicate the lack of certainty over some issues, thereby helping authorities and the public better appreciate how to weigh the IMF’s favored views.

2014 Triennial Surveillance Review - External Study - Integrating Bilateral and Multilateral Surveillance on a Continuing Basis
Author: International Monetary Fund