IMF presents newly released studies about world economy

The output performance of the world's economies moved together during the peak of the global financial crisis as never before in the recent history

IMF presents newly released studies about world economy

The global panic set in motion by the 2008-09 financial crisis generated an unprecedented output collapse around the world that temporarily had countries moving in close lockstep, according to a new study by the IMF.

The output performance of the world's economies moved together during the peak of the global financial crisis as never before in the recent history, according to a study published in the IMF's October 2013 World Economic Outlook report.

Correlations of various countries' GDP growth rates had been modest before the crisis but rose dramatically during 2007–09.

"Since crises are often driven by common factors, there are also gains from policy coordination. There are also gains from the financial side, like central banks coordinating to minimize market disruption.

There are also gains from the fiscal side, when there is a sudden collapse in output, which is driven by a common shock, countries can also coordinate fiscal policy to have a fiscal stimulus which is distributed across companies, to sustain the global economy and global trade, will definitely help," the study's author, Andrea Pescatori, said.

Looking at the Fed's upcoming tightening of monetary policy and an eventual possible interest rate hike, Pescatori said the response won't be the same across all countries.

"What we have seen that the effect of UMP is not homogeneous. If there's a 100 basis point increase unexpected tightening in the US would generate a 20 basis point tightening in the US even for countries not really pegged to the US dollar," Pescatori said.

A second study released Monday by the IMF looks at capital flows to emerging market economies as a source of particular and enduring concern to many policymakers.

As seen in the 1997-98 Asian crisis, surging inflows can fuel excessive credit growth, expanded current account deficits, appreciated exchange rates and a loss of competitiveness—followed by painful adjustment when the inflows reverse.

Countries often fight these buffeting winds with tight controls on exchange rates, capital flow management and aggressive interest rate movements. The IMF says that while these sometimes work, and are sometimes the best response to a crisis, all too often countries can find themselves felled by the wind.

The new paper recommends an approach to dealing with volatile international capital flows that emphasizes the soft and flexible response to capital flows rather than the hard and oak-like. Instead of trying to resist foreign inflows, countries can bend. The Fund says that the countries that proved to be more resilient to the turbulent gusts of international capital flows were not necessarily those that controlled the inflows, but those where foreign inflows were balanced by offsetting resident outflows.

"Take the soft approach to capital inflows rather than the hard. Rather than trying to oppose it directly, you bend and thereby you encourage capital outflows instead of trying to stop the inflows in the first place," the paper's author, John Simon, said.

The Fund says that the characteristics of countries where volatile capital inflows are balanced by offsetting resident outflows typically have strong institutions, such as independent inflation targeting central banks, stronger financial supervision and regulation and more flexible exchange rate regimes and limited restrictions on capital flows.

"If countries manage to change their institutions, instead of trying to deal with capital flight, they've already got reserves built up overseas in the form of either official reserves or private reserves that can then be repatriated and balance this all out," Simon said.

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Güncelleme Tarihi: 01 Ekim 2013, 17:50

Muhammed Öylek

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