Speech

Eighteenth Jacques Polak Annual Research Conference: “The Global Financial Cycle”

November 2, 2017

1. Introduction

Good morning! I am pleased to welcome you to the IMF’s 18^th Jacques Polak Annual Research Conference.

Maury Obstfeld and the Research Department have put together a program that is intellectually rich, combining innovative research and an outstanding line-up of speakers. I want to thank them for their hard work.

As you know, this event has become a major forum for researchers and policymakers to discuss the latest economic developments and to exchange ideas on the key challenges facing the global economy.

The theme this year is “The global financial cycle,” and it is certainly a topic worthy of this gathering.

As I said last month at Harvard, one of the challenges in an economic cycle is trying to gain perspective on it when you are in the midst of it.

I believe we can make some progress on that front over the next two days.

2. Three Questions for the Conference

The truth is that there are many unanswered questions facing the global economy when it comes to financial cycles.

Ten years ago, the financial crisis served as a sobering reminder of the severe and lasting economic damage that can be inflicted upon economies by booms and busts in capital flows.

A few numbers: From the early 2000s to 2007 there was an eight-fold increase in capital flows to emerging markets and developing economies, eventually rising to $660 billion before the crisis.

In 2008, those flows fell sharply to $115 billion.

In 2010, flows rebounded again, rising to a staggering $700 billion.

For any policymaker, for any economy, such volatility creates enormous challenges.

Moreover, the crisis made it abundantly clear that changes in global financial conditions can travel across borders instantly, affecting even the most well-managed economies.

Both before and after the crisis, important work has been done to help us better understand the causes and consequences of capital flow volatility as well as the impact of synchronized cycles.

Many of you have been part of that work.

At the same time, we recognize that there are still areas where we could all benefit from a little bit more perspective.

As George Santayana famously said, “ Those who do not understand history are doomed to repeat it.”

So, as we launch this conference, let me pose three questions on which I think we need a little more insight if we are to build a stronger global economy.

• First, how do policy decisions of advanced economies drive global financial and economic conditions felt by the rest of the world?
• Second, what channels transmit these spillovers?
• Third, how can we use this information to build a financial system better able to absorb shocks and mitigate risks? Or, put another way, how can these cycles be harnessed to build a safer and more inclusive global financial system?

I am sure you will have other questions to add to the discussion, but let us start here.

Question One – How Policy Decisions Can Ripple Across the Globe

The first question is how do policy decisions in advanced economies impact economic conditions for the rest of the world?

There is justified concern over the way in which the policies of advanced economies – including the United States – produce ripple effects in smaller open economies.

Later today, in the Mundell-Fleming lecture, Barry Eichengreen will explore the impact of trade policy on macroeconomic outcomes across borders.

I will not steal Barry’s thunder, but suffice to say that I think this lecture will make an important contribution to our understanding of spillovers.

Cross-border impacts is also an area where the Fund is actively engaged. In our surveillance work, we review the impact of spillovers and help countries develop frameworks to mitigate the negative impacts.

IMF recent research on this issue examined the impact of spillovers from France, Germany, the UK, the US and Japan on 55 other advanced and emerging markets. It showed that fiscal policy can have a significant impact on recipient countries, both within regions and globally. [1]

So spillovers of macroeconomic policies is an area where your discussions over these two days can truly benefit our efforts at the Fund as well as the efforts of so many around the world.

Question Two – What are the Channels of Transmission

Now, the second question you will tackle is a related one: How precisely do these conditions get transmitted across countries?

There are a variety of conduits. But one area which merits our particular attention this week is exchange rates.

A central tenet of international macroeconomics is that there is a relationship between the type of exchange rate a country uses and the relative openness of that country’s economy. A country faces a trade-off, so to speak, between exchange rate stability, free capital, and independent monetary policy.

And frequent boom-bust cycles have raised legitimate questions about the ability of some countries with flexible exchange rates to insulate their economies from the impact of policy changes in key financial centers.

To shed some light on this challenge, our conference will feature several papers that examine whether exchange rate flexibility amplifies or mitigates the impact of global financial shocks.

It is a topic that is core to our work at the Fund and critical to global economic stability.

Question Three – How to Build Safer and More Inclusive Financial Systems

This brings me my third question, and it is a broader one. How can these cycles be harnessed to build a safer and more inclusive global financial system ?

We all need to examine the different policy tools that can help lower the risks associated with capital flow volatility, while at the same time maximizing the benefits.

This question has implications beyond our conference.

The current pushback against globalization in some advanced economies means that now is the time to grapple with the effects of financial openness.

And while we evaluate the impacts we should simultaneously pursue thorough evaluations of the policies required to secure inclusive growth across all countries.

I look forward in particular to hearing about your conversation on these issues in the Economic Forum – moderated by Maury – tomorrow.

3. Conclusion

Let me conclude by returning to Santayana.

He once said, “Even the wisest mind has something yet to learn.”

I think it is that spirit that has brought together the brainpower in this room.

We have made progress, but we know that there is more we must do to meet the challenges of financial globalization - and ensure that it works for all.

Thank you very much.