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.

Against this backdrop, the IMF’s 15th Jacques Polak Annual Research Conference, “Cross-Border Spillovers,”on November 14-15 is timely. While spillovers are at the core of the IMF’s surveillance mandate, it is clear that a lot of work is taking place outside the IMF.

This year’s conference program brings together contributions by researchers both inside and outside the IMF, aimed at understanding the different channels through which shocks can be transmitted among economies, and how policies can help mitigate their impact. In particular, the conference will look at the main challenges posed by the outcome delivered by market forces, and whether there are adequate policy instruments at the national level to deal with these challenges. And if not, what can be realistically done in terms of policy coordination.

Global financial cycles and monetary independence

Hélène Rey, Professor of Economics at the London Business School, and Research Fellow at the Center for Economic Policy Research (CEPR) and the National Bureau of Economic Research (NBER), will give the keynote Mundell-Fleming lecture on the controversial issue of global financial cycles and the extent of monetary policy independence of national central banks.

The conference will also discuss 12 papers on key transmission channels of cross-border spillovers from monetary and fiscal policies, linkages in debt markets and trade integration, as well as policy instruments to manage capital flows and international policy cooperation.

Just to give you a flavor of what to expect, here are some of the questions that we will be discussing:

  • What is the impact of changes in US monetary policy on foreign bonds yields? Does it differ depending on the policy instrument used? Do conventional and unconventional policies have a different impact on the yield curve?
  • How has unconventional monetary policy by the European Central Bank worked? What was the impact on Europe and the on the rest of the world? What are the relevant transmission channels; are these similar to the ones under US UMP?
  • What is the impact of government spending on the exchange rate? Is it really associated to exchange rate depreciations, i.e. ‘beggar-thy-neighbor’ type of effects?
  • Do sovereign debt defaults in one country trigger defaults in other countries? Do they change the cost of financing and incentives to default in other countries?
  • What are the conditions under which international spillovers effects are Pareto efficient? How does equilibrium with strategic policy setting at the global level compare against equilibrium with global policy cooperation?
  • Is it optimal to restrict international capital flows amid financial markets incompleteness, i.e. prices sending signals that do not induce socially optimal outcomes?
  • Have capital controls been effective? How is their potential effectiveness affected by leaks—i.e. the limited enforcement of these measures?
  • Does deeper trade integration through international input linkages amplify cross-border spillovers?
  • Can fiscal and capital market integration dampen the transmission of leveraging/deleveraging shocks within a monetary union –i.e. Europe?
  • Did growth in countries with higher trade and financial integration fall more during the Great Depression?

The conference will conclude with an Economic Forum. A panel of experts, Jean Boivin (Deputy Chief Strategist at BlackRock and former Canada’s deputy finance minister), Hector Torres (Brazil’s Alternate Executive Director at the IMF Executive Board), Maurice Obstfeld (United States Council of Economic Advisers and University of California at Berkeley), and David Vines (Professor of Economics at the University of Oxford), will discuss their views on cross-border spillovers and policy coordination.

As in the past, we hope that research presented at this conference will contribute to new policy thinking here at the IMF and elsewhere, and that you can find time to read the papers posted online, and via the webcast of the Economic Forum at www.imf.org.

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