{
  "title": "Challenges Ahead: Managing Spillovers",
  "publication": "IMF Blog, November 26, 2014",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2014/11/26/challenges-ahead-managing-spillovers",
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  "summary": "Publication: Olivier Blanchard, Luc Laeven, Esteban Vesperoni; November 26, 2014.",
  "sections": [
    {
      "heading": "Setting the stage",
      "content": "- Publication: Olivier Blanchard, Luc Laeven, Esteban Vesperoni; November 26, 2014.\n- Event: IMF’s 15th Jacques Polak Annual Research Conference, Washington DC, November 13 and 14, 2014; theme: Cross-Border Spillovers.\n- Helene Rey (Mundell-Fleming lecture) — two main points:\n  - Large correlated movements in capital flows, risky asset prices and credit growth across developed and emerging economies constitute a “global financial cycle”.\n  - Countries cannot fully insulate themselves through exchange rate flexibility: effects of U.S. monetary policy on mortgage spreads were roughly the same for countries that adjusted interest rates and those that did not.\n- Implication from Rey: capital flows and valuation changes linked to the international use of the dollar have substantial effects on domestic financial systems beyond exchange rate movements; macroprudential policies and capital controls may be required to provide sufficient insulation."
    },
    {
      "heading": "Findings on specific spillovers",
      "content": "- Unconventional monetary policy (two papers):\n  - Simon Gilchrist, Vivian Yue, Egon Zakrajek:\n    - Conventional U.S. monetary policy surprises steepened foreign yield curves.\n    - Unconventional U.S. monetary policy flattened foreign yield curves.\n  - Marcel Fratzscher, Marco Lo Duca, Roland Straub:\n    - ECB unconventional policies had positive spillovers on equity prices across many countries.\n    - Impact on yields was limited to the euro area, especially Italy and Spain.\n    - ECB policies increased market confidence (reduced implied volatilities and sovereign and banks spreads) but had little impact on international portfolio flows.\n- Fiscal policy:\n  - Alan Auerbach and Yuriy Gorodnichenko:\n    - Addressed contradiction between models predicting exchange rate appreciation following higher public spending and empirical evidence of depreciation.\n    - Using U.S. daily data on defense spending commitments to identify public spending shocks, they find these shocks were typically associated with an appreciation, supporting theoretical predictions.\n- Trade and supply chains:\n  - Christoph Boehm, Aaron Flaaen, Nitya Pandalai Nayar:\n    - Study of the 2011 tsunami and earthquake in Japan shows strong effects of disruptions on imports and production of Japanese affiliates in the United States.\n    - Conclusion: in the short run, supply chains are very rigid and disruptions can affect the whole chain."
    },
    {
      "heading": "Measures aimed at reducing specific spillovers",
      "content": "- Anton Korinek:\n  - Provided an analytical framework to characterize when spillovers are a concern and when market equilibrium is efficient.\n  - Example result: FX intervention used to provide insurance to the tradable sector in response to capital flows can lead to an efficient allocation.\n- Marcos Chamon and Márcio Garcia:\n  - Examined capital controls in Brazil.\n  - Controls helped segment Brazil’s domestic financial market from the global one, creating a wedge between onshore and offshore prices of similar assets.\n  - Initial measures had limited success mitigating exchange rate appreciation.\n  - A tax on the notional amount of derivatives adopted in mid-2011 triggered a significant depreciation—likely due to complementarities with previous measures and supported by the beginning of the monetary easing cycle.\n- Julien Bengui and Javier Bianchi:\n  - Analyzed implementation challenges for capital controls.\n  - Despite leakages via unregulated agents, stabilization gains from preventing financial crises remain large."
    },
    {
      "heading": "Policy challenges, autonomy, and coordination",
      "content": "- Maurice Obstfeld:\n  - Financial openness challenges prudential tools.\n  - Even with effective monetary policy and exchange rate flexibility, financial stability is difficult to manage with an open capital account.\n  - Identified a ‘financial trilemma’: financial integration with global markets, national control over financial supervision and regulation, and financial stability are not all mutually compatible.\n  - Conclusion: the need for international policy coordination depends on the efficacy of macroprudential policies.\n  - Suggested critical areas for coordination: financial regulation, clear rules for capital controls, enhanced facilities for international liquidity support in key currencies to counteract downsides of gross reserve accumulation.\n- Jean Boivin:\n  - Political-level coordination is complex; a precondition is national acknowledgement of the importance of international spillovers.\n- Hector Torres:\n  - Unconventional policies place the global economy in uncharted waters; uncertainty and disagreements complicate cooperation.\n  - The IMF has an important role in clarifying and fostering consensus about spillovers.\n- David Vines:\n  - Full coordination may be too hard; advocated ‘concerted unilateral reforms’ whereby reforms in some countries influence others’ domestic reform choices (a strategy used by the G-20)."
    },
    {
      "heading": "Asynchronous monetary cycle — scenario and implications",
      "content": "- Conditional premises:\n  - (i) Helene Rey’s view: U.S. monetary policy is a driver of a global factor in asset prices, risk premia, mortgage spreads, etc., and its impact on global liquidity is stronger than effects from changes in future short-term rates.\n  - (ii) Evidence that ECB unconventional policy has a milder impact on capital flows and global liquidity than U.S. unconventional policies (per Fratzscher, Lo Duca, Straub).\n- Potential takeaway:\n  - An asynchronous exit from unconventional monetary policies between the U.S. and Europe could raise significant policy challenges.\n  - Such an asynchronous monetary cycle may require serious policy dialogue, especially among central bankers in advanced economies.\n\nSource: Challenges Ahead: Managing Spillovers, IMF blog page, November 26, 2014.\n\n---\n\n Content in this bundle\n\n- Mundell\n  - Mundell (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Mundell (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- Cross-Border Spillovers\n- www.imf.org/external/np/res/seminars/2014/arc\n- Simon Gilchrist, Vivian Yue, and Egon Zakrajek\n\nSource: https://www.imf.org/en/blogs/articles/2014/11/26/challenges-ahead-managing-spillovers"
    }
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    "[Markdown version](/en/blogs/articles/2014/11/26/challenges-ahead-managing-spillovers/index.md)",
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    "Authors: Olivier Blanchard, Luc Laeven, Esteban Vesperoni",
    "Published: November 26, 2014",
    "Publication: Olivier Blanchard, Luc Laeven, Esteban Vesperoni; November 26, 2014.",
    "Event: IMF’s 15th Jacques Polak Annual Research Conference, Washington DC, November 13 and 14, 2014; theme: Cross-Border Spillovers.",
    "Helene Rey (Mundell-Fleming lecture) — two main points:",
    "Implication from Rey: capital flows and valuation changes linked to the international use of the dollar have substantial effects on domestic financial systems beyond exchange rate movements; macroprudential policies and capital controls may be required to provide sufficient insulation.",
    "Unconventional monetary policy (two papers):",
    "Fiscal policy:",
    "Trade and supply chains:",
    "Anton Korinek:",
    "Marcos Chamon and Márcio Garcia:",
    "Julien Bengui and Javier Bianchi:",
    "Maurice Obstfeld:",
    "Jean Boivin:",
    "Hector Torres:",
    "David Vines:",
    "Conditional premises:",
    "Potential takeaway:",
    "**Mundell**",
    "[Cross-Border Spillovers](http://www.imf.org/external/np/res/seminars/2012/arc/index.htm)",
    "[www.imf.org/external/np/res/seminars/2014/arc](http://www.imf.org/external/np/res/seminars/2014/arc/)",
    "[Simon Gilchrist, Vivian Yue, and Egon Zakrajek](http://www.imf.org/external/np/res/seminars/2014/arc/index.htm)"
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