Central banks of large advanced and many emerging market economies have recently gone through a period of extraordinary expansion of their balance sheets and are all now possibly facing a transition to less abnormal times.
The Mist of Central Bank Balance Sheets Otaviano Canuto | Mon, 24 April 2017 This podcast is performed by Mr. Otaviano Canuto. Central banks of large advanced and many…
Financial markets seem to believe that president-elect Trump can deliver higher growth and inflation, as manifested in the rotation from bonds to equities. At the same time, the shock waves already felt by assets abroad may be a harbinger of the bumpy and treacherous journey ahead.
Global imbalances have not gone away as an issue, as they reveal that the global economic recovery may have been sub-par because of asymmetric excess surpluses in some countries and output below potential in many others. The end of the “era of global imbalances” may have been called too early. Lord Keynes’ argument about the asymmetry of adjustments between deficit and surplus economies remains stronger than ever.
Capital Finance International, spring 2016 World trade suffered another disappointing year in 2015, experiencing a contraction in merchandise trade volumes during the first half and only a low recovery…
Policy makers in the advanced economies at the core of the global financial crisis can make the claim that they prevented a new “Great Depression”. However, recovery since the outbreak of the crisis more than five years ago has been sluggish and feeble. Since these macroeconomic outcomes have to some extent been shaped by policy mixes adopted in those economies in response to the crisis, the appropriateness of those policy choices is a question worth revisiting. This is particularly the case as one considers the hypothesis that a long-run trend toward stagnation may have already been at play during the pre-crisis period, even if temporarily countervailed by pervasive asset price booms.
In the aftermath of the recent global financial crisis, advanced economies have continued to experience sluggish growth. Is this slow postcrisis growth the result of a policy response that was overly reliant on monetary policy, which ran into the zero interest rate lower bound before growth was restored? Looking deeper, is secular stagnation, which is related to the zero lower bound and was recently brought to the fore by Larry Summers, another potential cause for advanced economies’ failure to return to precrisis growth levels? This note seeks to answer these questions as well as identify what alternative policies might be pursued by advanced economies to escape secular stagnation, should stagnation proponents be proven correct. After a brief review of secular stagnation, Summers’ hypothesis is tested through a review of academic literature and opinion pieces. However, the secular stagnation theory is not without its critics; moreover, there is a debate between “Keynesian versus Schumpeterian” economists, which could help to shed light on the medium-term postcrisis outlook.
There is a core divergence among some “Keynesian” and “Schumpeterian” economists who have proposed such stagnation hypotheses; each camp points to different underlying factors for continued anemic levels of growth. “Keynesians” argue from the demand side, and believe that proactive fiscal policies are needed for a strong recovery, while “Schumpeterians” believe that the necessary force of creative destruction has continually been stymied by such policies.
Countercyclical moves by policy makers might have reduced the length and size of the observed output gap had fiscal policy operated as a countercyclical tool complementary to monetary policy. Regardless of whether restrictive fiscal policies have been a necessity or an option, the fact is that they have constituted a major factor leading to a subpar recovery performance.
The global economy looks poised to display better growth performance in 2014. Leading indicators are pointing upward – or at least to stability – in major growth poles. However, for this to translate into reality policymakers will need to be nimble enough to calibrate responses to idiosyncratic challenges.
Not long ago, many economists were anticipating a switchover in the global economy's main engines, with autonomous sources of growth in developing economies compensating for the drag of struggling advanced economies. But, in the last few months, enthusiasm about these economies’ prospects has given way to bleak forecasts.
Emerging Markets (EMs) are more likely to suffer shocks, such as commodity-price and terms-of-trade shocks, as well as surges and sudden stops in capital flows.. Furthermore, structural and institutional features typical of most EMs tend to amplify and propagate shocks. Even when asset price-led cycles are not generated within EMs, they tend to be affected the most due to capital flows.
The 2008 financial crisis has emphasized the importance of macro financial linkages. In the financial sector, attention is now focusing on macro prudential regulations that are geared toward the stability of the financial system as a whole. In the macro arena, the recognition that price stability was not sufficient to guarantee macroeconomic stability and that financial imbalances developed despite low inflation and small output gaps has highlighted the need for additional tools (macro prudential policies) to complement monetary policy in countercyclical management. Emerging markets (EMs) face different conditions and have key structural features that can have a bearing on the relevance and efficacy of policy measures. Drawing on Canuto, Otaviano, and Swati R. Ghosh, eds. 2013. Dealing with the Challenges of Macro Financial Linkages in Emerging Markets. Washington, DC: World Bank), this note discusses the challenges of dealing with macro financial linkages and explores the policy toolkit available for dealing with systemic risks, particularly in the context of EMs.
The 2008 financial crisis highlighted the challenges associated with global financial integration, emphasized the importance of macro financial linkages and challenged pre-crisis financial stability regimes.
While unconventional monetary policies have been appropriately anti-cyclical in ACs implementing them, they have had inappropriately pro-cyclical consequences on EMs -- boosting credit and demand when most economies among the latter were already heated up, and threatening to accentuate a slowdown where it started to happen.