Global economy

Laurence Boone, Marco Buti, 18 October 2019

After years of solid growth, worldwide economic activity has slowed down sharply in 2019 while global trade has stalled. At October’s annual meeting of the IMF, policymakers have the difficult task of addressing the immediate policy challenges to support economic growth while also preparing our economies for the future. This column argues that while monetary policy is widely recognised as facing increasing constraints, fiscal policy and structural reforms need to play a stronger role. In particular, fiscal policy could become more supportive, notably in the euro area. Undertaking the right type of public investment now – in infrastructure, education or to mitigate climate change – would both stimulate our economies and contribute to making them stronger and more sustainable. 

Francois de Soyres, Alexandre Gaillard, 21 September 2019

The recent increase in business cycle synchronisation is significantly associated with trade in intermediate inputs. This is an important consequence of global value chains, but we cannot understand it if we use a model in which real GDP movements are simply decomposed into changes in technology and factor supply. This column argues that accounting for profits and extensive margin adjustments reconciles theory and data and enriches our understanding of what makes countries interdependent, offering the first quantitative solution to the 'trade co-movement puzzle'.

Scott Baker, Nicholas Bloom, Steven Davis, 17 September 2019

Tariff threats, hikes, and retaliations have become a major source of economic uncertainty and stock market volatility. This column draws on three initiatives to demonstrate that recent rise in trade policy uncertainty, driven by the US withdrawal from the Trans-Pacific Partnership, tariff hikes on US steel and aluminium imports, ongoing Brexit uncertainty, and escalating US-China trade tensions, is extraordinary by several metrics. 

Zhen Huo, Andrei Levchenko, Nitya Pandalai-Nayar, 17 August 2019

The international co-movements of business cycles is a key determinant of trade and monetary policy, but the ways in which it is affected by technology, TFP, and trade openness are not fully understood. This column shows how such co-movements are affected by trade linkages and technology. It finds that non-technology shocks contribute more to international co-movement than TFP shocks, and that transmission plays a notable but small part in co-movements.

Marcus Miller, Lei Zhang, 16 August 2019

Externalities can have a powerful effect on financial stability. This column studies the amplification effect that can operate despite value at risk regulation, which suffers from the ‘fallacy of composition’. It shows that the magnitudes of booms and busts are amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to 'fire-sales' of securitised assets. In addition to economic models, legal and political factors should also be considered. 

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