IMF Connects Dots in Spillover Analysis of Major Economies

New reports enhance IMF analysis of economic flows, risks between countries

Financial channels most important for transmitting global shocks

Resolving U.S., Euro Area financial stresses critical for rest of world

The report is part of the IMF’s effort to strengthen policy analysis, by enhancing its assessment of interconnections between the world’s economies, and how policies in the larger economies impact the rest of the world.

Since the 2008 global financial crisis, economists and policymakers have become more aware of the risks and potential destabilizing effects that policies and shocks in major economies can have on other countries and regions.

The new focus on “spillover effects”—the impact of policies in one country on another because of the large volume of trade and financial linkages in today’s economy—has been a major element of the IMF’s work agenda in recent months.

This work culminated in a new “consolidated spillover report”. According to Ranjit Teja, Deputy Director of the IMF’s Strategy, Policy and Review Department, spillover reports are “aimed at improving our understanding of the interconnected nature of the world economy in order to support better policy collaboration at the global level.”

Telltale financial stresses

The consolidated report was discussed by the IMF’s Executive Board in late July and follows new detailed assessments of the impact of economic policies in the world’s five largest economies—China, the Euro Area, Japan, United Kingdom, and the United States—on their partner economies. The consolidated report focuses on overarching messages relevant for the global policy debate.

Key among these messages, the report highlights that “short-term policy spillovers hinge on their effects on financial markets” (rather than traditional trade channels). Policies that alleviate financial stress have a powerful and positive effect on the others. Thus, at the outset of the current crisis, the benefits of fiscal stimulus were magnified by the associated easing of financial stress.

Although the reports were completed before the recent bout of market turbulence, the findings illustrate that, “from the perspective of the rest of the world, the most positive spillovers would flow from resolving financial stresses from policy uncertainties,” Teja said.

“The importance of fiscal policy credibility has only increased with recent developments,” Teja added. Steps to enhance U.S. fiscal credibility tackle a key global...