Understanding Spillovers

IMF Blog, November 12, 2014

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Authors: Olivier Blanchard, Luc Laeven, Esteban Vesperoni
Date: November 12, 2014
Context: The global crisis and the sluggish recovery since 2009 highlight the importance of understanding interconnections and risks in the global economy, notably as global trade and cross-border financial activities have increased.
Purpose: Emphasizes the need to understand transmission channels of spillovers for both academic research and policymaking, given challenges in policy coordination following the 2009 crisis response.

Event: IMF’s 15th Jacques Polak Annual Research Conference, “Cross-Border Spillovers”
Dates: November 14-15
Scope:
- Understanding different channels through which shocks are transmitted among economies.
- Assessing how policies can mitigate spillover impacts.
- Examining challenges posed by market-driven outcomes and adequacy of national policy instruments.
- Exploring realistic possibilities for policy coordination.

Keynote: Mundell-Fleming lecture by Hélène Rey (Professor of Economics, London Business School; Research Fellow at CEPR and NBER) on “global financial cycles and the extent of monetary policy independence of national central banks.”
Papers: Discussion of 12 papers on:
- Transmission channels of cross-border spillovers from monetary and fiscal policies.
- Linkages in debt markets and trade integration.
- Policy instruments to manage capital flows and international policy cooperation.
Conclusion: Economic Forum panel with Jean Boivin, Hector Torres, Maurice Obstfeld, and David Vines discussing cross-border spillovers and policy coordination.

Impact of changes in US monetary policy on foreign bond yields, and variation by policy instrument.
Differences in impact on the yield curve between conventional and unconventional policies.
How unconventional monetary policy by the European Central Bank worked; its impact on Europe and the rest of the world; and relevant transmission channels compared to US UMP.
Impact of government spending on the exchange rate and whether it induces exchange rate depreciations (i.e., ‘beggar-thy-neighbor’ effects).
Whether sovereign debt defaults in one country trigger defaults in other countries, and effects on the cost of financing and incentives to default elsewhere.
Conditions under which international spillover effects are Pareto efficient.
Comparison of equilibrium with strategic policy setting at the global level versus equilibrium with global policy cooperation.
Optimality of restricting international capital flows amid financial markets incompleteness and when prices do not induce socially optimal outcomes.
Effectiveness of capital controls and how leaks (limited enforcement) affect potential effectiveness.
Whether deeper trade integration through international input linkages amplifies cross-border spillovers.
Whether fiscal and capital market integration can dampen transmission of leveraging/deleveraging shocks within a monetary union (i.e., Europe).
Whether growth in countries with higher trade and financial integration fell more during the Great Depression.

Aim: To bring together research from inside and outside the IMF to advance understanding of spillover channels and policy responses.
Outcome: Research presented is expected to contribute to new policy thinking at the IMF and elsewhere.
Accessibility: Papers posted online and an Economic Forum webcast available via www.imf.org.

Source: Understanding Spillovers (IMF blog post, November 12, 2014).