Monetary Policies in Advanced Economies: Good for Them, Good for Others


Accommodative monetary policies in systemic advanced economies can have a positive impact on economic activity in other countries, according to a new IMF analysis on the “spillover” impact of policies on other economies.


  • Actions to close output gaps in advanced economies will help other economies too
  • Emerging markets more resilient than in the past to effects of dollar appreciation
  • Corporate debt buildup in emerging markets bears watching
  • Seven years after the onset of the Great Recession, economic activity in many advanced economies remains below potential. In the euro area, for example, the output gap—how far output is below where it could be if all productive resources such as labor and capital were being fully utilized—is nearly 2½ percent.

    Central banks in the so-called systemic advanced economies—the euro area, Japan, the United Kingdom, and the United States—have responded with monetary policies that should help close output gaps. The IMF staff estimates that the euro area output gap will decline from nearly 3 percent in 2014 to about 1 percent in 2017. In Japan, the output gap, which was more than 1½ percent in 2014, is expected essentially to close by 2016.

    The closing of output gaps, in turn, will help lower unemployment and raise investment in these economies, as the IMF’s First Managing Director, David Lipton noted recently. But what impact will these policies have on other economies? This was the focus of the 2015 Spillover Report.

    Good for others

    There are fears expressed in some circles about the adverse impact on other economies of an increase in interest rates in advanced economies as they start to recover. The report, however, finds that closing output gaps in systemic advanced economies will on balance be good for other economies. Why interest rates are rising in advanced economies proves to be critical. If interest rates are going up because of improved economic prospects in these economies, that turns out to be beneficial for other economies. As advanced economies recover, they will increase their imports from other countries, providing a boost to those economies, offsetting the tighter financial conditions.

    As Chart 1 shows, a 1 percentage point increase in bond yields in either the United States or the euro area because of improved growth prospects leads to substantial increases in industrial production in other economies in the year following the increase. In short, good news about U.S. or euro area growth is good for others. These positive spillovers are amplified when there is good news about growth in both the United States and the euro area and dampened when there is good news about one but not the other.

    A Background Note...

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