Understanding Spillovers


By Olivier Blanchard, Luc Laeven and Esteban Vesperoni

The global crisis—which challenged paradigms about the functioning of financial markets and had significant consequences in other markets—and the sluggish recovery since 2009, are a reminder of the importance of understanding interconnections and risks in the global economy. The increasing trend in global trade, and even more significant, in cross-border financial activities, suggests that spillovers can take many different forms.

The understanding of transmission channels of spillovers has become essential, not only from an academic perspective, but also policymaking. The challenges faced by policy coordination after the initial response to the crisis in 2009—illustrated by the debate on the impact of unconventional monetary policy in emerging economies—raise wide ranging issues on fiscal, monetary, and financial policies.

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Mind the Dragon: Latin America’s Exposure to China


By Bertrand Gruss and Fabiano Rodrigues Bastos 

(version in Español and Português)

China is still a distant and exotic country in the mind of many people in Latin America. Yet, with the Asian giant rapidly expanding its ties with the region (the share of exports going to China is now ten times larger than in 2000), their economic fates seem to be increasingly connected. And in fact, a sharper slowdown in China now represents one of the key risks Latin Americans should be worried about—and prepare for. So, what is at stake? How much do shocks to China matter for economies in Latin America?

In an earlier study presented in our April 2014 Regional Economic Outlook, we analyzed growth spillovers in a large model of the global economy, focusing on the link through commodity prices. Here, we complement that analysis by using a simple yet novel approach that exploits the reaction of financial markets to the release of economic data. We find that growth surprises in China have a significant effect on market views about Latin American economies.

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When You Move, I Move: Increasing Synchronization Among Asia’s Economies


Romain DuvalBy Romain Duval

(Version in 中文, and 日本語)

In recent decades, trade integration within Asia has increased more than in other regions. In valued-added terms, intraregional trade grew on average by over 10 percent a year from 1990 to 2012, twice the pace seen outside of Asia. Likewise, financial integration within the region has started to catch up, although it still lags behind trade integration. Concomitantly, business cycles in Asia have become steadily more synchronized over the past two decades, with the correlation between ASEAN economies’ growth rates almost reaching the very high levels seen within the Euro Area.

As outlined in the IMF Asia and Pacific Department’s latest Regional Economic Outlook, these facts are related. Namely, increases in trade and financial integration have strengthened the propagation of growth shocks between regional partners, leading Asian economies to move more in lockstep. One driver of this synchronization of business cycles has been the increase in size and connectedness of China’s economy. Looking ahead, we expect regional integration agenda and a bigger China to further increase spillovers and growth co-movement across the region. Greater international cooperation, particularly regional and global financial safety nets, can help countries respond to the associated risk of more synchronized, sharper downturns, and thereby help Asia make the most of greater regional integration.

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Central, Eastern, and South-Eastern Europe: Safeguarding the Recovery as the Global Liquidity Tide Recedes


By Reza Moghadam, Aasim M. Husain, and Anna Ilyina

(Version in Türk)

Growth is gathering momentum in most of Central, Eastern, and South-Eastern Europe (CESEE) in the wake of the recovery in the euro area. Excluding the largest economies—Russia and Turkey—the IMF’s latest Regional Economic Issues report  projects the region to grow 2.3 percent in 2014, almost twice last year’s pace. This is certainly good news.

Figure 1

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Regional Spillovers in South America: How “Systemic” is Brazil?


By Gustavo Adler and Sebastián Sosa

(Version in Español)

The risks that policies and shocks in major economies can spillover on other countries and regions have become a matter of renewed concern since the global crisis of 2008–09. Brazil is South America’s giant; how important is its influence on neighboring countries?

Brazil accounts for 60 percent of South America’s output and its economic fluctuations are closely correlated with those of many of its neighboring countries. This would appear to suggest that economic activity in Brazil’s neighbors is strongly influenced by Brazil’s business cycle.

But these close comovements could also reflect common global factors that affect all South American countries similarly, such as commodity prices, international financial conditions, and global demand.

Our latest Regional Economic Outlook: Western Hemisphere examines this question, quantifying the importance of spillovers from Brazil to the rest of South America.

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Spring Is in the Air in Parts of Latin America


By Nicolás Eyzaguirre

(Version in Español)

Here in Washington D.C., Spring is showing its early signs, so we naturally feel a bit more upbeat. But spring comes in fits and starts—a day of sunshine, followed by cold rain, followed by sunshine again. So, we carry an umbrella on sunny days—but also have sunscreen ready.  It’s much the same for most of Latin America and the Caribbean, as we discuss in our Regional Economic Outlook for the Western Hemisphere. So, on a spring day, how do we see things?

Well, before explaining what I mean, let me start with a broad overview.

Most of Latin America stands out from much of the rest of the world—not for great economic performance, but for good performance in a subpar environment. Growth is generally solid, despite a slowdown late last year owing to policy tightening and global volatility. Under our baseline scenario, we expect regional growth to moderate to near 3¾ percent in 2012, down from 4½ percent last year (but modestly up from our January projections).

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Making Goldilocks Happy


By Carlo Cottarelli

When it comes to adjusting public spending, getting the balance right is important. Fiscal adjustment is taking place in economies around the world, but risks remain high. Bringing debt and deficits down to more moderate levels is important to easing risks.

From one perspective, the sooner this happens, the better.

But, slashing budgets too abruptly can impede the overall economic recovery. And if the recovery stalls, debt and deficits will rise, and so will unemployment.

According to our analysis, what is needed is a steady but gradual adjustment. So, as we’ve been saying at the IMF for a while now, the pace of adjustment needs to be appropriate—not too fast, not too slow, but just right, for countries where financing conditions allow.

Improving picture

Compared to six months ago, there has been some decline in risks. This is primarily because of progress in policy implementation, with progress being made particularly in Europe.

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