## How Policy Makers Can Better Predict a Downturn – and Prepare

_IMF Blog, October 3, 2017_

## Source details

**Canonical URL:** [How Policy Makers Can Better Predict a Downturn – and Prepare](https://www.imf.org/en/blogs/articles/2017/10/03/how-policy-makers-can-better-predict-a-downturn-and-prepare)

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- [Markdown version](/en/blogs/articles/2017/10/03/how-policy-makers-can-better-predict-a-downturn-and-prepare/index.md)
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## Bibliographic details
- Authors: Claudio Raddatz, Jay Surti
- Published: October 3, 2017

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### Overview
- The global financial crisis of 2008-2009 illustrated how periods of robust growth and calm financial markets can be followed by sudden market volatility and an unexpected economic downdraft.
- Financial conditions—including bond yields, oil prices, foreign exchange rates, and levels of domestic debt—provide valuable clues to the economic outlook and can improve the accuracy of forecasts.
- New analysis in the Global Financial Stability Report develops a tool that uses information in financial conditions to quantify risks to future growth and help policy makers take preventive steps.

### How the new tool helps predict downturns
- The tool identifies conditions that often precede trouble within 12 months:
  - rising market volatility
  - more risk-aversion among investors
  - widening of credit spreads (the difference in yield between ultra-safe securities such as US Treasury notes and other forms of debt)
- Over a period of two to three years, elevated levels of debt and credit growth are better signals of a challenging outlook.

### Dynamics during "good times"
- Low interest rates and rising asset prices can encourage risky behavior by firms and households.
- Consequences described:
  - increased borrowing and lending fueled by easier underwriting standards
  - boosted collateral values, bank capital, and profits
  - eventual market recognition of built-up vulnerabilities can trigger rapid increases in funding costs, tightening of credit, cascades of defaults, and bank failures
- Historical reference: the crisis culminated in the most severe recession since the 1930s.

### Commodity prices and differing country effects
- The importance of any given gauge depends on the type of economy.
- Examples:
  - Rising commodity prices benefit exporters such as Australia, Canada, and Brazil.
  - Rising commodity prices increase the risk of a downturn in commodity-importing countries.

### What financial conditions signaled at the time of the analysis
- Credit spreads are low and market volatility is low, suggesting a relatively benign near-term outlook.
- Growing debt levels signal risks down the road.
- A rapid increase in credit spreads and greater market volatility could significantly worsen the outlook for global growth.

### Policy recommendations and options
- Use macroprudential measures to curb credit growth and reduce the risk of a slump, including:
  - requiring banks to hold more capital as a buffer against losses
  - requiring families to make bigger down-payments on the homes they buy
- Once a crisis appears imminent, policy options include:
  - cutting central bank policy rates
  - deploying measures used during the last crisis, such as asset-purchase programs and emergency liquidity facilities

*Claudio Raddatz Kiefer, Jay Surti — October 3, 2017. How Policy Makers Can Better Predict a Downturn – and Prepare.*

---

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## References

- [عربي](https://blog-montada.imf.org/?p=5632)
- [https://www.imf.org/wp-content/uploads/2017/10/BLOG-1024x600-GFSR-CH-3-Singapore-stock-exchange.jpg](https://www.imf.org/wp-content/uploads/2017/10/BLOG-1024x600-GFSR-CH-3-Singapore-stock-exchange.jpg)
- [Global Financial Stability Report](http://www.imf.org/en/Publications/GFSR/Issues/2017/09/27/global-financial-stability-report-october-2017)
- [https://www.imf.org/wp-content/uploads/2017/10/ENG_Sept_27_GFSR_ch_3_1.png](https://www.imf.org/wp-content/uploads/2017/10/ENG_Sept_27_GFSR_ch_3_1.png)
- [https://www.imf.org/wp-content/uploads/2017/10/ENG_Sept_27_GFSR_ch_3_2-2.jpg](https://www.imf.org/wp-content/uploads/2017/10/ENG_Sept_27_GFSR_ch_3_2-2.jpg)

_Source: https://www.imf.org/en/blogs/articles/2017/10/03/how-policy-makers-can-better-predict-a-downturn-and-prepare_