World Economic Outlook, April 2002

The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Abstract

The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Summary by James Morsink

While the central focus of the IMF’s World Economic Outlook (WEO) is a comprehensive review of recent global developments, current prospects, risks, and policy recommendations, it also provides an in-depth analysis of a number of topical issues, which helps underpin the projections and policy advice. This article gives a brief summary of the analytical chapters of the April 2002 WEO.

The main analytical chapter contains an empirical analysis of recessions and recoveries in industrial countries, in order to place the recent global slowdown in context. The chapter looks at all the level recessions (these are roughly defined as two consecutive quarters of negative GDP growth) in 21 industrial countries over the period 1973–2001: 93 recessions in all. The chapter also look at the history of recessions going back to 1881 for a narrower set of countries. The main result is that, while every recession has its own unique features, the recent global slowdown had much in common with past downturns:

  • synchronized recessions are the historical norm,

  • a sharp drop in business fixed investment is typical in the lead-up to a recession,

  • increases in interest rates have regularly marked the onset of recessions,

  • the historical trend is toward shallower recessions, and

  • recoveries tend to be driven by upturns in private consumption.

Another analytical chapter contains three essays on how financial markets affect real activity. The first looks at why many countries in Latin America have had a disproportionate number of debt crises. The essay emphasizes three vulnerabilities. First, although external debt levels have not been high relative to GDP, they have often been high relative to exports. Second, macroeconomic volatility has been high, stemming not only from terms-of-trade shocks, but also from procyclical fiscal policy. Third, government borrowing is disproportionately external and foreign currency denominated, which has left countries exposed to the effects of a sharp sudden exchange rate depreciation. The essay notes that many countries in the region have made substantial progress in recent years, including important fiscal reforms and more flexible exchange rate systems, so vulnerabilities should be lower going forward.

The second essay looks at wealth effects on consumption, in particular the impact of huge run-ups in household wealth in industrial countries during the 1990s on consumer spending. The essay finds that the impact is larger in market-based financial systems than in bank-based systems, reflecting the greater share of household assets held as equities and housing in market-based systems, as well as households’ greater ability to borrow against their wealth. The analysis also finds that consumption has become increasingly sensitive to stock market and housing prices. To the extent that changes in wealth affect inflation and output, stock market and housing prices may have become more significant considerations for monetary policy, though this does not imply that monetary policy should directly target asset prices.

The third essay looks at the challenges to monetary policy in a low inflation era. The essay argues that the reduction in inflation in industrial countries owed much to widespread changes—including institutional changes—in the conduct of monetary policy toward a more hawkish attitude on inflation, and the associated beneficial shifts in private sector behavior. In the new low-inflation environment, central banks need to balance concerns about higher inflation against concerns about deflation. Downward nominal rigidities of prices and wages make adjustment to deflation painful. If, in addition, inflation expectations are sluggish, then deflation puts a floor on how low the central bank can push real interest rates, given that nominal interest rates cannot go below zero. Concerns about deflation suggest that central banks need to be more proactive in responding to sharp downward shocks to activity. The essay argues that the danger of getting into a sustained deflation increases as inflation targets are lowered.

The April 2002 WEO can be found in full-text format at http://www.imf.org/research.

IMF Research Bulletin, June 2002
Author: International Monetary Fund. Research Dept.