Transcript of a Press Briefing by Simon Johnson, Economic Counsellor and Director of Research, with Roberto Cardarelli, Natalia Tamirisa and Nikola Spatafora, on the World Economic Outlook Analytic Chapters

April 3, 2008

With Roberto Cardarelli, Natalia Tamirisa, and Nikola Spatafora
Washington, D.C.
Thursday, April 3, 2008
Webcast of the press briefing

MR. MURRAY: Good day. I'm William Murray, Chief of Media Relations at the IMF, and this is our embargoed briefing on the 2008 Spring WEO Chapters 3, 4, and 5. Again, this briefing is only on Chapters 3, 4, and 5. It's embargoed until 11:00 a.m. Washington time, which is approximately two hours from now, or 1500 GMT. Simon will have some opening remarks, but before he gives them to you, let me introduce everybody else at the table. Simon Johnson, Economic Counsellor and Director of Research; Roberto Cardarelli, principal author of Chapter 3; Natalia Tamirisa, principal author of Chapter 4; and Nicola Spatafora, the principal author of Chapter 5 of the World Economic Outlook. Simon?

MR. JOHNSON: Thanks very much, Bill. Before I turn to the content of our analytical chapters in this year's report, let me say a few words about the current financial market upheaval and its implications for the global economy. First, global economic prospects have weakened, slowed by the effects of financial disruptions that began with the U.S. subprime mortgage crisis, but have spread more widely across the financial system. Growth in advanced economies appears set to decline in 2008 and we expect some deceleration in major emerging economies, although growth there should remain above trend.

At the center of the slowdown, growth in the U.S. economy has come to a virtual standstill and we expect it to remain weak over the coming quarters owing to deeper problems in credit and housing markets that are fed off each other. Notwithstanding the strong response from U.S. policymakers, tighter financial conditions, higher energy prices, softer labor markets, and the weak housing market all conspire to weigh heavily on the economy in the near term.

In Europe we also expect to see slower growth perhaps with some lag in light of the U.S. downturn. Beyond trade links, Western Europe in particular is vulnerable to financial spillovers from deeper credit market strains in the United States. Moreover, a possible correction in certain national housing markets could weigh on consumer confidence and consumption. Indeed, deeper and more protracted strains on financial markets pose the main downside risk for the global economy. An intensification of problems in U.S. housing and credit markets could further slow the U.S. economy and weigh on the arc of the recovery. This in turn could lead to further financial losses and strains on bank balance sheets that might further constrain their capacity or willingness to lend with a macroeconomic impact felt more widely.

In emerging and developing economies where activity is expected to moderate but still remain strong, risks appear more balanced, but market turmoil could also slow financial flows including to several countries in emerging Europe that have benefited from large banking inflows in recent years. Moreover, significantly weaker global growth could slow exports and prompt a decline in commodity prices that could slow domestic demand. However, commodity prices have to date remained strong despite the signs of weakening economic activity, and high or rising oil and food prices have played a major role in increasing inflation pressures around the globe. In fact, I cannot recall a time where I have seen such a striking dichotomy between global commodity and credit markets each sending conflicting signals regarding the global outlook.

On the global outlook, let me just conclude by saying I will have a lot more to say about the details at our main World Economic Outlook press conference on April 9, next Wednesday. The focus of today's discussion as Bill mentioned is on the key issues raised in our WEO analytical chapters. There are close parallels between the themes in these chapters and the press challenges facing the global economy both at present and looking beyond the near term.

In Chapter 3 of the WEO, we consider more closely the repercussions of financial turmoil focusing on housing markets and then links to the wider economy. The United States in a sense is at one end of the spectrum in terms of the sophistication of its mortgage markets and where financial innovations have made it easier for a wider group of U.S. households to gain access to mortgage credit. This may have gone some way to increase the exposure of the economy to developments in the housing market.

Countries differ significantly in their systems of mortgage finance and these differences can play an influencing role in the strength of linkages for a country's housing market to the wider economy. It also highlights that other countries including many in Continental Europe may not be as exposed to housing market developments. Among the key findings, the importance of housing is greater in economies where access to mortgage credit is easier. Why? Because larger use of homes as collateral strengthens the feedback of rising house prices onto consumption via increased household borrowing. Recent innovations in mortgages have generally increased the impact of money policy on house prices by increasing access to mortgage financing and the degree of leverage in mortgage debt. And the conduct of monetary policy needs to take into account the level of development in the mortgage market. With higher household mortgage debt, stabilization outcomes could be improved if monetary policymakers respond relatively more aggressively to movements in house prices particularly when there are unusually rapid rises that could take prices far out of line with fundamentals. Moreover, this policy approach should be symmetric, raising rates to limit the risk of a buildup in market imbalances, as well as lowering rates in response to concerns of an overly rapid price decline.

But this does not mean that monetary policy should target house prices. Given the uncertainty about housing booms and how to manage them, house prices should be one of the many elements to be considered in assessing the balance of risks within a risk-management approach to monetary policy. Moreover, monetary policy alone cannot bear the full weight, and regulatory policy also has a critical role to play.

Coming back to commodity prices, Chapter 5 of this year's report examines the recent commodity boom and its relationship with globalization and prospects for developing countries. The context matters here. Emerging and developing economies have become important players in a more integrated global economy against the backdrop of soaring commodity prices and improved institutions and policies. Key implications are twofold. First, these countries have been an increasingly important component of global demand for commodities. Total trade, that is, exports plus imports, now constitute between 50 to 100 percent of GDP, and total foreign capital ranges from 100 to 200 percent of GDP across many regions of the developing world. This surge in global integration has occurred against the background of strong growth in emerging and developing countries and a broad-based rise in commodity prices of about 75 percent in real terms since 2000. These expansions have become increasingly interrelated.

Second, developing country commodity exporters have benefited from the current commodity price boom more than before. Policy barriers to trade and financial flows have declined steadily and the quality of institutions and macroeconomic management have generally improved, allowing countries to better tap into the benefits, although the contribution of commodity prices, themselves to trade and financial integration has been relatively small.

Sustained efforts to further improve institutions and policy frameworks would support continued progress toward further integration of developing countries and improve their ability to withstand abrupt changes in commodity prices. The analysis in this chapter implies that even if commodity prices were to lose their current buoyancy, the process of integration is unlikely to be reversed. Continued improvements in institutional quality, financial deepening, fiscal prudence, and external liberalization will continue to be important drivers of integration. Nevertheless, increased diversification and reform progress would reduce their vulnerabilities to commodity price shocks in many developing countries that remain dependent on commodity exports.

Finally, let me turn to Chapter 4 where we consider a policy issue with potentially enormous global consequences for the macroeconomy and cross-country spillovers, and that is climate change, one of the world's greatest collective-action problems. Let me stress that the IMF does not have expertise on the science of climate change. Where we can contribute is on the analysis of the macroeconomic, financial, and fiscal implications on the policies to address climate change. Our research shows that putting a price on greenhouse gases emissions that contribute to climate change would have an initial adverse effect on productivity and growth, saving investment, capital flows, and exchange rates are also likely to be affected, but a well-designed policy framework can help contain these costs. To minimize the costs of mitigation policies, it will be crucial to build a framework that is sustainable and provides incentives for broad country participation. The IMF staff analysis points to some lessons as to how such policies could be more effective and efficient.

First, carbon pricing policies need to be long term and credible. Policies need to establish a time horizon for steadily rising carbon prices that people and businesses believe. Higher carbon prices would then induce the required shifts in investment and consumption away from emission-intensive products and technologies. And gradual price increases starting early and from a low level would minimize the cost of adjustment. A framework for multilateral action should induce all groups of economies, advanced, emerging market, and developing, to start pricing their emissions. Any policy framework that does not include large and fast-growing economies such as Brazil, China, India, and Russia, in some fashion would be costly and politically difficult. That is because during the next 50 years, 70 percent of emissions are projected to come from emerging and developing economies.

Carbon pricing policies should also aim at establishing a common world price for emissions. This would ensure that emissions reduction occur where it is least costly to do so. If carbon prices are not equalized across countries, the global cost of mitigation policies will be at least 50 percent higher. Carbon pricing policies should be sufficiently flexible to accommodate the business cycle. During periods of high demand it would be more costly for firms to reduce emissions and the opposite will be true when demand is low. Abatement costs will be lower if firms are allowed to vary their emissions over the cycle while still targeting a given level of emissions reductions over the medium term. Unlike carbon taxes, schemes for trading emission permits, also known as cap and trade, could prove restrictive in periods of high growth unless they incorporate elements that help control price volatility, so-called hybrid policies.

Finally, the costs of mitigation need to be distributed equitably on a global basis. Transfers under cap and trade schemes need to account for how easily different countries could reduce emissions. A scheme generating a flow of transfers toward emerging and developing countries would reduce the costs of carbon pricing policies for them and would encourage their participation. However, such flows may also put an upward pressure on exchange rates in the recipient countries leading to symptoms of the so-called Dutch disease problem. It will be important to put in place supporting policies that could help to address these issues. Thank you.

Before we turn to questions, perhaps I could just shamelessly plug my blog which is now back on stream and will be active for the next few weeks. You or your listeners and readers are welcome to pose questions and comments there. Thank you.

MR. MURRAY: Thanks, Simon. Before we start taking questions, let me just remind everybody who is online to begin submitting your questions. We're going to try to take care of those as much as we possibly can. I'm going to start now with journalists who are here at IMF headquarters and then we'll switch to questions being submitted online. The gentleman in the front row here, please.

QUESTIONER: I have a question on Spain which is one of the countries that you mentioned in your housing chapter. Do you foresee a continuation of the slowdown in housing there given your method of analysis? And also what kind of impact it will have on the economy. In your chapter you mentioned that residential investment is a very important part of the Spanish economy so in that light, what do you see for the economy there? Thank you.

MR. JOHNSON: A lot of these questions I'm going to involve the chapter authors, and I'll turn to Roberto in a minute. I think we should be clear we're not in the business—IMF is not in the business of forecasting short-term movements in asset prices of any kind. What we talk about in the chapter is fundamental determinants of housing prices and we do identify situations where prices apparently have diverged from the fundamentals to some degree, but that's a very medium-term statement that we're making there and there are many different ways that adjustment can take place including through changes in the fundamentals, for example, if growth picks up in any particular country. So do interpret our findings please carefully in those terms that we're talking about medium-term determinants and drivers of housing activity and other things like that. Roberto?

MR. CARDARELLI: Sure. What we did here in this chapter is we estimated what in real terms house prices should be based on a bunch of variables that should affect house prices in the long-term like, like demographics, interest rates, credit growth, measure of affordability, and based on those measures we see that real house prices in Spain are between 15 and 20 percent overvalued. That's not actually a very high number compared to other countries, countries with much larger overvaluation. One of the reasons why Spain has already gone through a huge correction in terms of housing prices, in terms of year-on-year growth they went from double digits, actually larger than 20 percent, to basically zero over the last quarter. So the correction in house prices in Spain has occurred already but we see in real terms some further scope for correction.

In terms of residential investment though, we didn't see a strong sort of weakening of residential investment in Spain, and right now at the end of 2007, residential investment as a share of GDP in Spain is still very high compared to the trend. It's slightly below 10 percent. We estimate the trend is about 5 to 6 percent. So there is some way to go there. And considered that in Spain, the share of residential investment to GDP is much higher than the other economies, it's second only to Ireland in our sample, any consequences from a slowdown in residential investment is probably going to be stronger in Spain than in other European economies.

QUESTIONER: Mr. Johnson, could you speak a bit more of this dichotomy and conflicting signals of rising commodity prices and the credit markets? And particularly, what do you and your colleagues see for the inflationary impact of this boom? You used the word boom in commodity prices. You don't use the word bubble. Do you see any tendency toward bubbles in any of these commodities over the last 6 months?

MR. JOHNSON: I'll bring Nicola, the chapter author, in in a moment to answer this question. The point that the chapter tries to make is the increase in commodity prices has been quite protracted do that prices have increased since 2000 and we think that most of that increase has been due to strong global demand and the fact that growth around the world has been more broad-based, middle-income and emerging markets have grown faster and have demanded a lot of commodities, and most of the increase in commodity prices we think has been justified by that global boom. So it has been very broad-based. It's involved pretty much all commodities and that's the context of the chapter.

The dichotomy which I was mentioning and I think you were following-up on is of course what's happened to commodity prices more recently, for example, in the last 6 months, and I would actually say since the beginning of this year. Our view, and which I think we have communicated clearly and we will tell you the number next week, is the prospects for global economic growth have slowed down since January when we provided out last interim forecast, and at the same time, commodity prices have increased. That's an unusual combination. When you think that the global economy is slowing down, usually commodity prices would come down with some lag it must be said, commodity prices are not usually a leading indicator of changes in the global cycle. So there is a puzzle there. There are a number of possible answers. One is that the global economy may not be slowing down. Perhaps we're wrong and perhaps other people are wrong, the commodity markets are taking a different view, but it could also be financial factors. Real interest rates, for example, are low now in dollar terms and this may be encouraging people to take other positions in commodities for example. And it may also be a form of—diversification when the dollar is depreciating. So there are a number of shorter-term factors there that are playing into this dichotomy and these conflicting signals and it is hard to know which one of these markets is correct. Let me turn to Nicola to see if he wants to add something to that.

MR. SPATAFORA: While our research does not focus on the short-term outlook for commodity prices, we did ask how can developing countries best position themselves to take advantage of whatever developments may arise in the commodity markets, whether we expect them to continue going up or down. And overall we found that it will be crucially important to continue to strengthening their institutional frameworks and policy frameworks, and let me single out two aspects there. First, the continued need for fiscal prudence. Many of these developing countries including commodity exporters have seen significant improvements in the fiscal position compared to previous booms, but it's still unclear to what extent this is structural as opposed to cyclical and it will be important to safeguard these gains. Another factor I'd like to emphasize is the need for continued external liberalization across all sectors.

QUESTIONER: Staying on the commodity issue, when you say in global growth there's a slowdown but that it's unlikely to affect what's been going on with the trade issue, is that because a lot of this is so-called south-south trade and as the U.S. Europe slow down further I gather would you see that south-south trade picking up?

MR. JOHNSON: Thanks for the question. Certainly there is more south-south trade now than in the past and certainly the image of China producing manufactured goods and buying commodities from Africa or from Latin America as imports that that's a correct image, we do see that in the statistics. And this is one reason we think that while we don't believe in a strong from of decoupling in the world economy, we do acknowledge or even emphasize divergence. I almost tell you what our forecast was but I won't tell you. The broad pattern which you'll see in our forecast is one of divergence. In part that's due to the south-south trade. In part it's also due to the kind of factors that Nicola was talking about. The emerging markets and developing countries have done a good job of creating the basis for sustaining of growth so that even if commodity prices do come down a bit, that that shouldn't too much of a problem for them. They don't seem to be as vulnerable as they were in some previous episodes. So there's south-south trade, there's a resilience to their economies, and there's a diversification of their exports that are all sort of playing together to give you I think what we see right now as divergence.

QUESTIONER: Just to follow-up, how much of this that you've got in here has to do with food? Are you mainly talking about metals or are you also talking about food as well? It's everything?

MR. JOHNSON: As I said, it's been a very broad-based commodity boom that includes metals, food, and fuel, so basically all commodities. The timing was slightly different. Metals prices went up earlier, food prices came up more recently. The dynamics of each one is a little different. Also the move toward biofuels has played an important role in food. And now of course food and fuel are feeding off each other so that the fuel prices in particular are feeding into higher food prices in emerging markets and this is a very serious issue.

QUESTIONER: Right. If you don't mind, one thing about the food issue, as you know, a lot of countries are addressing the increase in food prices in different ways, some with price controls, others with taxes, and sometimes even export bans of some commodities. What price controls would help a country right now? Is it just a short-term thing? Are there any examples of where price controls have actually been good?

MR. JOHNSON: That's a very good question. We may have to come back to you four or five dozen times on that. But I think in general we don't like price controls. We do recognize sometimes governments want to buffer the effects of shocks. And unfortunately, the buffering that's happening on fuels for example, measures people take just to slow down the pass through of oil price increases to consumers, that's part of what keeps the prices high because then demand doesn't come down. In general we'd much rather see governments when they feel there is a pressing need to provide some direct income support to need people rather than trying to twice prices around in such a way as to help certain groups. That kind of price intervention or price mechanism often doesn't turn out very well, and of course we do worry about the fiscal implications, and those are becoming noticeable, let's say, in quite a few countries around the world. So, these are serious issues, and we need to talk further with our membership about them, particularly if commodity prices stay at these levels.

QUESTIONER: I just want to get one clarity and ask one or two questions. Last time we were here, you quite correctly predicted a little bit of slowdown partly because of the mortgage crisis here in the U.S., but you still maintained that the poorer countries which have been experiencing a little bit of growth for the past year or two are still going to experiment that kind of growth. Can I get a clarity? Is that still your take right now, seeing to it that, you know, all the, you know, markets' turmoil that are affecting everybody. Is that still your position, first of all?

And, secondly, perhaps you have been very much considerate of the development in the southern tip of Africa, whereas Zimbabwe has always been the (inaudible) in that part of the world, and with the changes now—political changes—do you think that we might be heading for a better prospect for that country, for Zimbabwe? You know, it has the highest inflation rate in the world, over 10,000 percent.

And would want to comment, also, about the energy crises of Africa and the fact that inflation has gone up more than what the Central Bank has predicted (inaudible).

Thank you.

MR. JOHNSON: Okay, the reason we have this WEO chapter on commodities was exactly to explore for ourselves and also for you what are the likely prospects for developing countries if commodity prices stay high and also if they come down. So, we would want to sort of, if you like, do a sort of stress test type of thinking for commodity exporters, and I think the results from this chapter are somewhat encouraging, although as Nikola emphasized, the chapter does say you have to continue to make progress on fiscal frameworks and on trade liberalization.

We were just discussing a moment ago movements away from trade liberalization, various kinds of protectionism that are creeping into commodity markets. Those are not helpful. So, we are—I would not say that we are complacent on this issue. I think we are trying to get these people to stay focused on the core policy agenda—and we do think there's a bit of a slowdown coming for everyone. But we do think that the developing countries—for example, in Africa but more broadly—have got a strong basis for sustaining their growth, and we think if they continue to follow through on the policy frameworks and if they manage to handle the energy problems, high energy costs—which are not just in South Africa, they're more general—then we think that growth prospects would be fairly good.

Just with regard to your specific question about Zimbabwe, I don't know the latest developments. I haven't been tracking them. But I would say that it should be pretty obvious that IMF always feels hyperinflation is a terribly destructive process, and any time a country can end hyperinflation, bring it down under control, you're going to see substantially better economic prospects. Hyperinflation is, arguably, the most destructive kind of economic situation a country can encounter, and that would be a number one priority for any country that has such high inflation.

MR. MURRAY: Okay, thanks, Simon.

I'm going to turn to the Media Briefing Center now. We return to Spain housing on this question, a follow-up. Regarding the housing sector in Spain, what can be done to lessen the effects of the correction on the economy, if anything?

MR. CARDARELLI: What we've done here is we analyzed the effects of monetary policy changes in the housing sector, and we conclude that changes in monetary policy may have stronger effects on the housing sectors and may smooth the consequences on the economy through negative, and positive for the matter, developments in the housing sector. What we may have looked at over the years, it's a sort of a change in the channels of transmission of monetary policy to the housing sector, less through residential investment, and that's because mortgage markets have been more integrated with capital markets, have sort of made themselves less dependent on the amount of credit available out there, so this channel has lost importance over time, but on the other side, monetary policy effects on house prices have become stronger and especially in economies with more developed mortgage markets where it's easier for household to access mortgage credit and where household sector is more leveraged.  In our index, for example, the Spain mortgage markets is not among the most developed among most economies, but, I mean, huge progress has been done there as well, so the chapter suggests that there is a role for monetary policy to play in smoothing the negative consequences of the slow down—of this housing sector slowdown on the economy.

QUESTIONER: Mr. Johnson, I go back to your opening remarks, which, by the way, I hope we are going to have a copy of the writings before we leave here.

MR. MURRAY: Copies will be placed on the Media Briefing Center as soon as we wrap up.

QUESTIONER: Good. Very interesting about—your remark about global slowdown, and if I understood correctly—I am afraid I could have missed something about the risk of more spillover from the housing market crisis in Western Europe if I didn't get it correctly.

First question is do you see a risk of a global recession? And that's it for now.

MR. JOHNSON: Yes, well, next Wednesday we'll talk about that in detail. I think that I'll stick with the fairly general language that we had in the introduction, which is, these are serious problems. It's not—and it's limited to the U.S. And it's not limited to housing either. I mean, I think that there are concerns more broadly about other asset prices and the concerns about spreading to other kinds of debt—more consumer debt. And so in places where consumers have a high degree of leverage or where—which is certainly in the United States and some other industrial countries. But also housing is a large part of household net worth in Europe for example. So, if there is a housing price correction, and we see it in a few places—I wouldn't say we get to see it widely, but this could affect consumption directly as well as through affecting the financial system where household leverages are.

MR. MURRAY: Okay, thanks.

This is a good point for me to remind people in the Media Briefing Center to submit questions before we wrap this briefing up. Also I would recommend everybody, both here in the room and also on line, to visit the Spring Meeting's website. The public engagement schedule is on there, including details regarding Simon Johnson's press conference next week on April 9th at 9 a.m. on the WEO chapters 1 and 2. That press conference will be live at 9 a.m.  It will not be embargoed.

Again, if we have any more questions in the room—okay, let's go—gentleman towards the back of the room.

QUESTIONER: I just want to make sure I wasn't—I was reading correctly your chapter on housing, and I came a little late so maybe you covered this. But the way I was reading it, you were urging Central Banks to take housing more into account in how they set their interest rate policy. Sometimes you said that—seemed to say that pretty clearly, sometimes you seemed to hedge.

And then the other question was you had several indicators as people have asked questions about the housing as to overvalued and so on. Are you saying that—are you saying clearly that Central Banks ought to take housing into account and here are some of the indicators they could use to give them a sense of what to do?

MR. JOHNSON: Yes. So, we're trying to be quite careful in what we're saying about monetary policy in housing. We think that in a risk management approach it make sense to consider house prices as one element. We're not saying they should—that monetary policy should target house prices; we're saying it should be part of your assessment of the balance of risks. That is a very different—very different statement, and we try to make that clear in the chapter. And we think it has—but we think—it also has to be symmetric, that we think that if Central Banks—we think it is appropriate for Central Banks to consider what is happening to house prices when house prices may be coming down and to think about how that could be affecting the economy and to worry about this from a risk management basis, introducing potential nonlinearities for example. But it should be the thinking that it should be symmetric, so when house prices are going up it would also be appropriate for Central Banks to think about that from a risk management perspective, including how that's going to affect inflation, including how that's going to affect vulnerabilities.

We're also not laying the entire responsibility for thinking about housing and house prices with monetary authorities. We do stress that the regulators need to be properly equipped both sort of in terms of their intellectual frameworks and in terms of their powers to deal with the housing situation. So, we're not shifting too much onto the monetary authorities.

In terms of the evaluation analysis, you know, I think this is—you should take this very much as people like yourselves take the IMS view on exchange rates. The IMF takes a view on exchange rates and we say we think exchanges are overvalued or undervalued relative to their medium-term fundamentals, and I think at this point you all understand we're not saying exchange is going to be one way or the other tomorrow or next week. What we're saying is that over the next five years we'd expect to see a tendency for exchange rates to move in a certain direction in order to, for example, bring current accounts back towards what we regard as sustainable levels. And I think it's the same sort of reasoning we're applying to the housing market. We're saying that there are some fundamentals and those fundamentals would support a certain level of prices, and prices sometimes above—and, by the way, they're not always—they're not always above what's fundamental, sometimes they're below in some of the countries that have had a chapter or have house prices below what would be suggested by fundamentals—and in our view this would suggest a process. Again over the medium term we'd expect the fundamentals and the house prices to come closer together. Now, that could happen through fundamentals changing. For example, real interest rates change—that affects fundamentals; income growth could change; access to mortgage finance could change in various ways; or there could be a change in house prices—that's—those are the terms that we are thinking about.

QUESTIONER: Just as a follow-up, if the Central Banks agreed with your recommendations, how would you see the current practice compared to what you're proposing? How much different would it be?

MR. CARDARELLI: Well, I think what they're doing right now is to ease monetary policy aggressively, and they're easing it aggressively especially in the economies where mortgage rate is higher where the mortgage market is more developed in the sense that it's easier for households to access mortgages, to use homes as collateral, to extract equity out of homes. And that's actually a very important conclusion of the chapter. What Simon said it's true, so we're recommending a more symmetric approach within this risk management monetary policy approach, but this is especially true, I would stress, in economies where mortgage markets are more developed; in economies where mortgage markets are less developed, there is sort of a less urgency in a way, to adopt this kind of behavior. And it's sort of something that you see going on right now so, for example, the Fed has been easing more aggressively than the ECB.  There are structural differences in mortgage markets between the U.S. and Europe.  Europe, according to our indexes, is—most of the countries in Europe have less developed mortgage markets than the U.S. This is consistent with what we're saying in our model, in our research saying in these kinds of economies when mortgage markets are less developed serve there's less volatility coming out of development in the housing sector. So, there is less of a need for monetary policy to respond strongly to house prices. For economies like the U.S. with a very developed mortgage market, there's more of a point in responding to house prices when things start changing as rapidly as they are now.

MR. MURRAY: Thanks, Roberto.

Let me turn again to the Media Briefing Center. We'll get back to the room. We have some time for a few more questions.

This is directed—it's from Brazil. It's regarding Brazil and the commodity issue directed to Simon Johnson. Do you believe the Brazilian economy could maintain strong growth if commodity prices go down? How much can the country benefit from a rise in commodity prices?

MR. JOHNSON: Well, I think it's a hypothetical question about commodity prices. I will obviously talk about our forecast for Brazil and other commodity producers next week. I think the point that we're trying to get at in the chapter is, you know, the extent to which countries are dependent on commodity exports and the extent to which they can sustain growth if there are sort of bumps in the road in terms of commodity prices. Obviously, any country that exports commodities needs to think about diversifying away from commodities and that the evidence in the chapter is that quite a few countries have made progress with that. So, it's hard to go beyond that, and I'll answer hypothetically. It depends on exactly which commodities—which commodity prices and exactly the time in which that occurs. But I think that we are encouraged in general by the greater apparent resilience of many commodity exporters.  They've made good use of this boom, in our opinion, relative to how some previous booms have gone, and so this should help, moving forward, whatever happens to commodity prices.

MR. MURRAY: Thanks, Simon. We'll be able to explore Brazil in more detail—Brazil specific stuff in more detail next week.

Back to the gentleman in the rear of the room.

QUESTIONER: If Spain's housing prices may be 15 to 20 percent above what the fundamentals justify, is that similarly the case for the United States?

MR. CARDARELI: For the United States we actually have more around 10—from 10 to 15, so it's a little bit less than that. And, again, I think the reason—there are maybe two reasons. One is that increasing house prices in the U.S. has been even less rapid than in Spain, for example. I would say also compared to many other economies that we looked at.

And the second is that in real terms house pricing, and in nominal terms as well, house pricing in U.S. have already come down. Actually, it's the only country together with Ireland where growth has been negative. So, part of the adjustment has already occurred. That's why relative to the other countries the U.S. is not as bad as other economies.

MR. JOHNSON: I would also just add to that—remember this comparison is in real terms. To the extent you have some inflation in the United States, which we do, that would reduce the amount of nominal price change necessary to bring you back towards this fundamental value, okay? So, it—you have to think about the inflation part and subtract that out from the gap between nominal prices and the fundamentals.

MR. MURRAY: Okay, I'm about the wrap this up. Are there any last—lady in the center here. We'll go to the last question unless we have other indications.

QUESTIONER: Well, I feel that—I mean, we have to talk about climate change. It's one of the big issues. And I know you (inaudible) estimates the future damages from climate change, but do you have any sort of idea looking at what—currently what the damages have been?

And the other thing is if you could explain more about looking at the—you said here the cost of policies to address climate change can be contained by ensuring that mitigation policies are well designed. It would be crucial to aim at a framework that is sustainable and provides incentives for broad country participation. Could you elaborate a little on that please?

MS. TARIMISA: In our research we haven't produced any original estimates of damages from climate change. And review of the literature suggests that generally these damages are likely to fall on future generations. But already now we do see examples of how climate change affects countries. For example, in India and Bangladesh there is increased incidence of droughts. There are also floods that tend to follow different patterns than historically, and scientists tend to attribute this also to the effects of climate change. In recent years, there have been several heat waves in Europe and also many tend to associate this with climate change. And of course there are some countries in the world—for example, Pacific Island economies—that have been affected by rise in sea level, and they are likely to be affected even more in the coming years.

On the second part of your question, costs of mitigation policies and how they can be contained by providing incentives to countries to participate in mitigation efforts, we do believe that it is important that any sort of policy on mitigating climate change covers a broad group of countries—advanced emerging market economies, developing countries—because in the next 50 years it is projected that 70 percent of emissions will come from emerging and developing economies.  How could these incentives be provided? This will depend on the specific design of mitigation policies. For example, on the cap and trade policies or hybrid policies, it is possible to design them in a way that would generate some financial transfers towards emerging and developing countries. This would help provide incentives for these countries to join mitigation efforts and also reduce the cost of mitigation efforts for these countries. As Simon mentioned earlier, these transfers, if they're significant, could be associated with certain economic effects and it's important to put in place supporting policies to counter such effects.

MR. MURRAY: Thanks, Natalia. Thanks, Simon, Roberto, and Nikola for joining us today. I'm going to wrap up this briefing. Again, it's embargoed until 11 a.m. D.C. time 1500 GMT. If you have any additional questions, or you want to double check information from your notes, send an email to and we'll follow up with the Research Department. Also there are video clips available currently on News Market for broadcasters, which include interviews with the authors and I recommend broadcasters go there. Again, thank you for joining us.


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