{"id":61715,"date":"2013-04-23T13:06:40","date_gmt":"2013-04-23T03:06:40","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2013\/04\/23\/why-is-this-global-recovery-different\/"},"modified":"2013-04-23T13:06:40","modified_gmt":"2013-04-23T03:06:40","slug":"why-is-this-global-recovery-different","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2013\/04\/23\/why-is-this-global-recovery-different\/","title":{"rendered":"Why Is This Global Recovery Different?"},"content":{"rendered":"<p>\n\tBy M. <span>Ayhan<\/span> <span>Kose<\/span>, <span>Prakash<\/span> <span>Loungani<\/span>, Marco E. <span>Terrones<\/span><\/p>\n<p>\n\t<em>The Great Recession has been followed by a &lsquo;Not-So-Great Recovery&rsquo;. Why the recovery has been weak and protracted remains a matter of debate. This column argues that one specific aspect of the current global recovery makes it different from previous ones. Over the course of past recoveries, both monetary and fiscal policies maintained an accommodative stance. In this global recovery, fiscal and monetary policies in advanced economies are pushing in opposite directions. <\/em><\/p>\n<p>\n\tThere is an intensive discussion about the weak and protracted nature of the ongoing recovery.<\/p>\n<ul>\n<li>\n\t\tSome argue that this is not surprising since recessions associated with financial crises are often followed by sluggish recoveries (<span>Reinhart<\/span> and <span>Rogoff<\/span> 2012).<\/li>\n<li>\n\t\tOthers claim that policy uncertainty has been a major impediment to growth in the US (Baker et al. 2012).<\/li>\n<li>\n\t\tYet others <span>emphasise<\/span> additional elements, including problems in the design of the <span>Eurozone<\/span> and the highly <span>synchronised<\/span> nature of the 2009 recession (<span>Bems<\/span>, Johnson, and Yi 2009; Weil 2012; <span>Reichlin<\/span> et al. 2013).<\/li>\n<\/ul>\n<p>\n\tIn the latest World Economic Outlook, we <span>analyse<\/span> the evolution of fiscal and monetary policies during the ongoing global recovery and show that they have been following rather distinct trajectories compared with those during the previous episodes. We argue that, along with other factors as highlighted in the literature, it is important to consider the role of policies in determining the growth outcomes during recoveries.<\/p>\n<p>\n\t<strong>Understanding global recessions and recoveries<\/strong><\/p>\n<p>\n\tThe world has experienced four global recessions over the past 50 years &#8211; 1975, 1982, 1991, and 2009. A global recession is a decline in world GDP per capita accompanied by a broad decline in other indicators of the global economic activity such as industrial production and employment (see <span>Kose<\/span> et al. <span>2013b<\/span>). These global recessions were followed by global recoveries, whereby economic activity rebounded generally accompanied by a <span>synchronised<\/span> pickup in worldwide consumption, investment and trade.<\/p>\n<p>\n\t<strong>Divergence of activity<\/strong><\/p>\n<p>\n\tAt first blush, the current global recovery is following a path strikingly similar to the average of the three past recoveries (Figure 1). The world economy has been able to return to the pre-recession level of world output within a year.<\/p>\n<p>\n\t<img decoding=\"async\" alt=\"\" src=\"http:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/vox23-4-13-1.jpg\" style=\"width: 600px;height: 363px\" \/><\/p>\n<p>\n\tBut this masks a sharp divergence of activity across advanced and emerging market economies (Figure 2). This recovery has been the weakest for advanced economies and the strongest for emerging markets. The IMF&rsquo;s forecasts suggest that this divergence will persist in the near term.<\/p>\n<p>\n\t<img decoding=\"async\" alt=\"\" src=\"http:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/vox23-4-13-2.jpg\" style=\"width: 600px;height: 403px\" \/><\/p>\n<p>\n\t<strong>Divergence of policies<\/strong><\/p>\n<p>\n\tWhat accounts for this divergence in fortunes? As we noted above, there are several factors that could explain this, including the severity of the financial crisis, problems in the design of the <span>Eurozone<\/span>, the highly <span>synchronised<\/span> nature of this recession, uncertainty associated with policies, and so on. Another factor at play could be the substantially different paths of fiscal and monetary policies in advanced economies. In particular, whereas the directions of fiscal and monetary policies were aligned in previous episodes, during the current recovery these policies have marched in opposite directions.<\/p>\n<p>\n\tThe current and projected paths of government expenditures in the advanced economies are quite different than during past recoveries (Figure 3). During the past recoveries, fiscal policy was decisively expansionary, with increases in real primary government expenditures. This time is different. It is true that in some advanced economies, especially in the US, the fiscal stimulus introduced at the outset of the Great Recession was far larger than during earlier recessions. However, the stimulus was unwound early in the ensuing recovery. Specifically, expenditures fell during the first two years of this global recovery and are projected to continue to decline modestly in the coming years. This pattern also holds across the major advanced economies, with the <span>Eurozone<\/span> and the UK showing sharp departures from the typical paths of government expenditures in the past.<\/p>\n<p>\n\t<img decoding=\"async\" alt=\"\" src=\"http:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/vox23-4-13-3.jpg\" style=\"width: 600px;height: 352px\" \/><\/p>\n<p>\n\tIn contrast, in the emerging market economies the ongoing recovery has been accompanied by a more expansionary fiscal policy stance than during past episodes. This was possible because these economies had stronger fiscal positions this time around than in the past.<\/p>\n<p>\n\tMonetary policies in the advanced economies have been exceptionally accommodative during the latest recovery compared with earlier episodes (Figure 4). Policy rates have been reduced to record-low levels and central bank balance sheets in the major advanced economies have been dramatically expanded compared with earlier episodes. Monetary policy in emerging market economies has also been more supportive of economic activity than in the past.<\/p>\n<p>\n\t<img decoding=\"async\" alt=\"\" src=\"http:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/vox23-4-13-4.jpg\" style=\"width: 620px;height: 386px\" \/><\/p>\n<p>\n\t<strong>What explains the divergence of policies?<\/strong><\/p>\n<p>\n\tCaution about fiscal stimulus and the pace of consolidation in this recession and recovery are likely explained by high ratios of public debt to GDP and large deficits (Figure 5). Advanced economies entered the Great Recession with much higher levels of debt than in past recessions. These high debt levels reflect a combination of factors including expansionary fiscal policies in the run-up to the recession, financial sector support measures, and substantial revenue losses resulting from the severity of the Great Recession. The deficit levels in some advanced economies are currently large in part because of the collapse in revenues.<\/p>\n<p>\n\t<img decoding=\"async\" alt=\"\" src=\"http:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/vox23-4-13-5.jpg\" style=\"width: 600px;height: 372px\" \/><\/p>\n<p>\n\tMoreover, sovereign debt crises in some Eurozone periphery countries and challenges associated with market access put pressure on these economies to accelerate their fiscal consolidation plans. At the same time, there was more room for monetary policy manoeuvring because inflation rates were much lower at the beginning of the recession than in the past.<\/p>\n<p>\n\t<strong>What policy mix?<\/strong><\/p>\n<p>\n\tThe evidence presented here does not in itself permit an assessment of whether the different policy mix in this recession and recovery was appropriate. The response of policies may have been reasonable given the respective room available for fiscal and monetary policies in advanced economies.<\/p>\n<p>\n\tHowever, there are also concerns. Even though monetary policy has been effective, policymakers had to resort to unconventional measures and even with these measures, the zero bound on interest rates and the extent of financial disruption during the crisis have lowered the traction of monetary policy (Werning 2012; Krishnamurthy and Vissing-Jorgensen 2011; D&rsquo;Amico et al. 2012; Swanson and Williams 2013). This, together with the extent of slack in these economies, may have amplified the impact of contractionary fiscal policies (Blanchard and Leigh 2013; Christiano, Eichenbaum and Rebelo 2011; Auerbach and Gorodnichenko 2012).<\/p>\n<p>\n\tFour years into a weak recovery, policymakers may need to worry about the risk of overburdening monetary policy as it is now being relied upon to deliver far more than it has ever needed to in the past.<\/p>\n<p>\n\t<strong>References<\/strong><\/p>\n<p>\n\tAuerbach, A and Y Gorodnichenko (2012), &ldquo;Measuring the Output Responses to Fiscal Policy&rdquo;, <em>American Economic Journal &ndash; Economic Policy<\/em> 4, 1&ndash;27.<\/p>\n<p>\n\tBaker, S, N Bloom, S J Davis and J Van Reenen (2012), &ldquo;<a href=\"http:\/\/www.voxeu.org\/article\/economic-recovery-and-policy-uncertainty-us\" target=\"_blank\">Economic Recovery and Policy Uncertainty in the US<\/a>&rdquo;, VoxEU.org, 29 October.<\/p>\n<p>\n\tBarth III, M J and V A Ramey (2001), &ldquo;The Cost Channel of Monetary Transmission&rdquo;, in Bernanke, Ben and Kenneth Rogoff (eds.), <em>NBER Macroeconomics Annual 2001.<\/em><\/p>\n<p>\n\tBems, R, R Johnson and K-M Yi (2009), &ldquo;<a href=\"http:\/\/www.voxeu.org\/article\/collapse-global-trade-update-role-vertical-linkages\" target=\"_blank\">The Collapse of Global Trade: Update on the Role of Vertical Linkages<\/a>&rdquo;, VoxEU.org, 27 November.<\/p>\n<p>\n\tBlanchard, O and D Leigh (2013), &ldquo;Growth Forecast Errors and Fiscal Multipliers&rdquo;, IMF Working Paper, No. 13\/1.<\/p>\n<p>\n\tChristiano, L, M Eichenbaum and S Rebelo (2011), &ldquo;When Is the Government Spending Multiplier Large?&rdquo;, <em>Journal of Political Economy<\/em> 119, 78&ndash;121.<\/p>\n<p>\n\tD&rsquo;Amico, S, W English, D Lopez-Salido and E Nelson (2012), &ldquo;The Federal Reserve&rsquo;s Large-Scale Asset Purchase Programs: Rationale and Effects&rdquo;, Working Paper, 2012-85, Finance and Discussion Series.<\/p>\n<p>\n\tWeil, P (2012), Your Feedback (Thank You)&quot; &#8211; Warning this story contains unashamedly positive feedback on the service provided.<\/p>\n<p>\n\t<strong>M. Ayhan Kose <\/strong>is Assistant to the Director in the IMF Research Department. He previously worked for the United States and Canada desks of the IMF Western Hemisphere Department. He was also an Assistant Professor at Brandeis International Business School and a Visiting Professor at INSEAD. His research focuses on financial globalization, macro-financial linkages, emerging markets, and business and financial cycles.<\/p>\n<p>\n\t<strong>Prakash Loungani <\/strong>is a senior resource manager and advisor in the IMF&#039;s Research Department. He is also an adjunct professor at Vanderbilt University&#039;s Owen School of Management and Johns Hopkins University&#039;s School of Advanced International Studies.<\/p>\n<p>\n\t<strong>Marco E Terrones <\/strong>is Deputy Division Chief in the IMF Research Department. Prior to this he was the main desk officer for Colombia and Nicaragua in the IMF Western Hemisphere Department. He also taught at Vanderbilt University and the University of Western Ontario and was a Principal Researcher at GRADE, a Peruvian think tank.<\/p>\n<p>\n\t<em>Authors&rsquo; note: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated.<\/em><\/p>\n<p>\n\t<em>Republished with permission from the publisher. Copyright VoxEU.org &#8211; the above story was originally published on www.VoxEU.org &#8211; readers reading this story through a third party channel may find that any graphs are not included (our apologies for this technical anomaly) &#8211; here&#039;s a link to the original story on the VoxEU website: click <a href=\"http:\/\/www.voxeu.org\/article\/why-global-recovery-different\">HERE<\/a><\/em><\/p>\n<p>\n\t<em>Views expressed are not by association FNArena&#039;s (see our disclaimer).<\/em><\/p>\n<p>\n\t<strong>Technical limitations<\/strong><\/p>\n<p>\n\t<strong><span style=\"font-style: italic\">If you are reading this story through a third party distribution channel and you cannot see charts included<\/span>, <em>we <span>apologise<\/span>, but technical limitations are to blame.<\/em><\/strong><\/p>\n<p>\n\t<em>Find out why FNArena subscribers like the service so much: &quot;<a href=\"http:\/\/www.fnarena.com\/index4.cfm?type=dsp_newsitem&amp;n=29EB960D-9DFF-C00E-7F6B464E5D52E250\">Your Feedback (Thank You)<\/a>&quot; &#8211; Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>IMF researchers show how important it is to consider the role of policies in determining the growth outcomes during recoveries.<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/61715"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=61715"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/61715\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=61715"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=61715"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=61715"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}