Close Ties Led to Crisis in World's Five Major Economies
| Author | International Monetary Fund |
The world's five major economies-the United States, the euro area, China, Japan, and the United Kingdom (which has a highly internationalized banking sector)-together account for more than half of global output, 70 percent of net global financial flows, and almost two thirds of global saving.How did the global economic crisis, which originated in the United States and then spread quickly to the rest of the world, impact these five very different economies? An IMF study looks at common factors and compares policy responses.
The study sought to draw out similarities and differences in how policymakers coped with the crisis by looking at the IMF's reports on the world's five major economies. The reports were based on discussions IMF officials had had with the governments during May and June 2009, a period still dominated by the "free fall" after the financial crisis. Given lags in data flow, the individual reports were very much focused on policy issues related to the origin, consequences, and immediate policy responses to the crisis.
The study found that three main themes were discussed in all five country reports:
* How the crisis spread
* How policymakers responded
* How policymakers are seeking to unwind crisis-related policies
The United States, the United Kingdom, and the euro area together account for over two-thirds of global gross capital flows and their financial sectors are closely linked. As a result, the bank problems in the United States spread almost immediately to Europe. By contrast, the limited international financial integration of China and Japan meant that these two countries were not directly exposed to the toxic assets originating from the United States, a fact that helped contain the direct impact of the crisis on local banks.
Instead, China and Japan were hit by the crisis through trade. The collapse in world trade that was the outcome of lower spending by consumers in Europe and the United States on highly traded consumer durables and investment goods hit the export-oriented economies of the two Asian economies hard.
Policymakers calibrated their policy responses-which included liquidity support, bank support, and fiscal stimulus-to their countries' circumstances. For the United States and Europe, the risk of almost instantaneous market reactions...
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