Thinking Beyond the Crisis: Themes from the IMF’s 10th Annual Research Conference


By Olivier J. Blanchard 

We celebrated the 10th anniversary of the IMF’s research conference with an outstanding group of presenters and a record number of participants. The main topic of this year’s conference was “Financial Frictions and Macroeconomic Adjustment.”

Two days of scholarly exchange among researchers and policymakers focused on various themes related to the crisis. I’ve summarized here some of these themes along with their implications for future research.

1.      Household leverage played a critical role in shaping the dynamics during the current U.S. recession. The first paper of the conference provided convincing evidence that the U.S. counties where household leverage had grown the most during the boom were also the ones that experienced the largest busts as measured by home prices, defaults, auto sales, and unemployment. Future research should focus on the policy implications of these findings, especially in the context of the role of monetary policy in mitigating the adverse effects of asset bubbles. 

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This Time Is Different—Fiscal Policy in Low-income Countries


By Carlo Cottarelli

When it comes to the crisis, most of the media attention is focused on advanced and emerging market countries. But low-income countries have been badly hit too, reflecting their growing integration in the world economy. We can see sharp declines in exports, FDI, tourism, and remittances. Output growth in 2009 will be less than half of the pre-crisis rate of over 5 percent. Sub-Saharan Africa is the worst affected, with a contraction of real per capita GDP of almost 1 percent.

This is the bad news. But there is some good news in all of this. Low-income countries have been able to use fiscal policy as a countercyclical tool this time around, far more than in the past. Fiscal deficits are expected to increase in three-quarters of low-income countries in 2009, with an average expansion of 3 percent of GDP. Revenues have grown slower than GDP, reflecting the disproportionate impact of the crisis on trade and commodity revenues, as well as weakening tax compliance. Expenditures are expected to increase by about 2 percentage points of GDP.

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Climate Change—Some Simple (and Quite Convenient) Truths


By Carlo Cottarelli

As world leaders gather in Copenhagen, climate change is again in the headlines. The science of the issue can get pretty incomprehensible pretty quickly. And the politics are clearly very ugly. Let’s not forget, however, that much of the economics is simple.

It’s an externality, stupid—so price it

Climate change is an “externality” problem. Individuals, firms, and, yes, governments, do not take full account of the harm that others suffer when they emit greenhouse gases. So they emit too much. And the best way to stop them doing this is to charge them a price for the carbon content of what they emit: a “carbon price.”

Admittedly, climate change is a particularly complicated externality. Since the damage will fall largely on future generations, the proper price depends very much on how we value their well-being relative to ours. The importance of such long-lived investments as power-stations, and the heavy sunk costs of investing in new technologies, mean that the carbon prices people expect in the future are even more important than the price now. And the fact that the world’s supply of fossil fuels is ultimately fixed means that the effect of carbon prices on total emissions is not as clear cut as it may seem.

Emission reductions solely by those countries historically responsible for the accumulated stock of emissions will not come close to solving the climate problem (photo: Newscom)

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The Health Care Challenge: Not Just a U.S. Problem


By Carlo Cottarelli

Health spending in OECD countries increased from 4½ percent of GDP in 1960 to 12½ percent in 2007 (see Figure 1 below). What accounts for this dramatic increase? Income growth, insurance, demographics, and technological change all contributed, but the latter was the key driver. Public spending for health care also increased sharply (by 5½ percentage points of GDP) during this period (see Figure 2).

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Balancing Fiscal Support with Fiscal Solvency


By Carlo Cottarelli

As I noted in my last post, government deficits in many countries—particularly in advanced countries—have jumped dramatically in the wake of the global crisis, and government debt has reached levels that could jeopardize longer term macroeconomic stability and growth. These countries will need to tighten fiscal policy significantly sometime down the road, especially where demographic trends are pushing up health and pension spending.

But fiscal deficits cannot be lowered in the immediate future. For the time being, fiscal (and monetary) policies must continue to support economic activity. The economic recovery is uneven and could be threatened by any premature withdrawal of policy support. Private demand is still unable to stand on its own two feet.

 This gives rise to a policy conundrum. How can we reconcile the competing requirements of  short-term support for the economy and longer term fiscal solvency?

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Post-Crisis: What Should Be the Goal of a Fiscal Exit Strategy?


By Carlo Cottarelli

One obvious fallout of the global financial crisis is a huge deterioration in fiscal conditions, particularly in advanced countries. The numbers are nothing short of staggering. Gross general government debt in the G-20 advanced economies is projected to approach 120 percent of GDP by 2014, up from about 80 percent in 2007, and this is even assuming no renewal of fiscal stimulus beyond 2010.

Some might think that this comes from an “exotic” form of fiscal policy whereby governments opened their coffers to prop up financial institutions. But only a small part of this debt spike is matched by a rise in financial assets. It really boils down to “plain vanilla” deficits—revenue losses from the recession, fiscal stimulus, and some underlying spending increases that would have occurred even without a recession.

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Asia and the IMF: Toward a Deeper Engagement


Update: IMF Managing Director Dominique Strauss-Kahn delivered speeches in both Singapore and Beijing. In Singapore he spoke of a leadership role for Asia, while in Beijing he addressed how China is leading the world out of recession and the need for further reform of China’s dynamic economy.

By Anoop Singh

(Version in 日本語)

Asia’s standing and influence continues to grow and the IMF is working with the region to help it meet its full economic potential as it recovers from the global crisis.  In mid-November, the  Managing Director of the IMF, Dominique Strauss-Kahn,  begins a six-day trip to Asia.  First he’s in Singapore attending the 16th Asia-Pacific Economic Cooperation (APEC) Finance Ministers’ Meeting, and then goes on to China November 16-17, one of the region’s most dynamic economies. 

In Singapore, the Managing Director co-chairs a roundtable discussion on economic policy challenges facing the region and will deliver a lecture on the role of Asia in reshaping the post-crisis global economy. In China, he will discuss with the authorities their policy response to the global crisis and ask senior government officials about their outlook for the Chinese and world economies.

The visit is another sign of the importance which the IMF attaches to its relationship with  Asia as the region leads the world away from crisis toward global recovery.  It will also provide Asia and the IMF an opportunity to deepen their engagement.

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