Improving understanding of interconnected nature of world economy can support better policy collaboration at global level (photo: Newscom)
IMF-WORLD BANK ANNUAL MEETINGS
The new emphasis on spillovers—the impact of policies in one country on another because of trade and financial linkages—was motivated by the desire to strengthen the IMF’s economic analysis in the wake of the global economic crisis.
“Improving our understanding of the interconnected nature of the world economy can support better policy collaboration at the global level,” said Reza Moghadam, head of the IMF’s Strategy Policy and Review Department, who chaired the seminar.
The September 23 event was part of a broader Program of Seminars held during the Annual Meetings.
Value added
Seminar participants all agreed that spillover reports had added value to surveillance by bringing more granularity to the way IMF monitors, assesses, and advises on economic and financial policies.
“The spillover reports have made good progress in bridging the gap between the domestic focus of bilateral surveillance and the broad sweep of multilateral surveillance,” said Prasarn Trairatvorakul, Governor of the Bank of Thailand. Mexican central bank governor Agustín Carstens thought the reports a “very important new product” that addressed a very fundamental issue for those affected by the systemic economies.
Reflecting on his involvement in the discussions on the United Kingdom spillover report, Deputy Governor of the Bank of England Paul Tucker said that, “The interactions with Fund staff on this were terrifically engaging, and focused and actually meaningful.”
Kemal Derviş, Vice President and Director of the Brookings Institution, argued that strengthening the dialogue with the countries concerned and making that analysis transparent to other members, made the IMF “a truly global institution.”
Crisis prevention
Since the 2008 global financial crisis, economists and policymakers have become more aware of the risks and potential destabilizing effects that policies and shocks in major economies have on the rest.
Carstens likened the undetected crisis in 2008 to high blood pressure: the problem lurks silently, with no apparent effect—until one day it’s too late. Spillover reports are one way for the IMF to do more to take global economy’s blood pressure.
“Certainly I would call for this to be part of the toolkit of the Fund and more than anything for this to be an important pillar in the whole crisis prevention effort … because it’s much better to prevent crises than resolve them,” said Carstens.
All too often international policy discussions focus on how the global economy affects individual economies. “What gets missed is that everyone talks about the global economy or financial system like it’s outside the room, whereas actually you have inside the room more or less the whole global economy,” said Tucker. Spillover reports fill that gap—“a report that engages explicitly with spillovers is hugely welcome,” he added.
Financial stresses
The goal has been to make IMF surveillance as interconnected as the global economy. In this regard, the first round of spillover reports revealed important insights about the nature of spillovers.
Traditional spillovers have often focused on trade flows and, as Trairatvorakul explained, trade spillovers from advanced economies can still have a significant adverse impact on emerging markets.
But, for many large economies, trade flows no longer pose the main risk. “What is more surprising and new is the analysis of transmission mechanisms and spillovers through financial markets, and not just through financial flows, but through the transmission mechanism on asset values and interest rates,” said Derviş.
Given the role of London’s financial market in channeling global savings toward global investment, Tucker said “the spillover report on the UK was a reminder that the financial stability endeavor in the UK is about more than our own financial stability; this is something we owe to the rest of the world.”
Future considerations
Participants pointed to several considerations in the ongoing management of the spillover exercise and for making the reports even stronger.
The world’s five largest economies—China, the Euro Area, Japan, the United Kingdom, and the United States—might have been what Carstens called the “obvious picks” for the first spillover reports, but he and Tucker also pointed to the challenges of assessing what is systemic. “The Fund will really have to have a good mechanism to identify what is really systemic,” said Carstens. Tucker argued that what is systemic “is contextual and thus very difficult to assess.”
Noting that the crisis is a combination of interrelated problems—banking, fiscal, external—Tucker called for embedding an integrated approach. This requires changing institutional culture both in the IMF and central banks so that the various parts of the institutions “are part of a common endeavor.” The spillover reports are indicative of how “the culture is starting to change.”
Discussions of “spillover effects really add value to … the dialogue with the country, to the analysis of the policy challenges in these countries. I think therefore there is valuable space for having these spillover reports continue,” Derviş said.
Trairatvorakul argued for further such efforts, with the goal of “leveraging and integrating the various surveillance products.”
Carstens agreed. The spillover reports should feed into other multilateral surveillance where you bring all the aspects together and “at some point it would be interesting—especially in the consolidated report—to dwell more on how these spillovers interact and feed into each other,” he said.
If the IMF takes this exercise forward “it will be good for the world and I certainly think it’s been good for the UK,” concluded Tucker.
