Ambrogio Cesa-Bianchi, Fernando Eguren Martin and Gregory Thwaites.
Why do banking crises happen in “waves” across countries? Do global developments matter for domestic financial stability? Is there such a thing as a global cycle in domestic credit? In this post we link these ideas and show that foreign financial developments in general, and global credit growth in particular, are powerful predictors of domestic banking crises. Channels seem to be financial rather than related to trade, and these include transmission of market sentiment, cross-border portfolio flows and direct crisis contagion.
This blog discusses the impact of economic uncertainty on euro-area activity. To do that, we built on the methodology developed for the UK by Haddow et al. (2013). Our analysis suggests that elevated economic uncertainty has been an important driver of euro-area GDP during the financial and sovereign crisis, detracting (on average) around 0.5 pp from annual euro-area growth in the period between 2008Q3 and 2011Q3. As the shock unwound, GDP was boosted during the subsequent recovery. This analysis suggests that any further increase in uncertainty could have a materially negative impact on euro-area activity. Therefore, it needs to be carefully monitored by policy makers, particularly in the context of the upcoming political elections in a number of countries.
Real interest rates have fallen by around 5 percentage points since the 1980s. Many economists attribute this to “secular” trends such as a structural slowdown in global growth, changing demographics and a fall in the relative price of capital goods which will hold equilibrium rates low for a decade or more (Eggertsson et al., Summers, Rachel and Smith, and IMF). In this blog post, I argue this explanation is wrong because it’s at odds with pre-1980s experience. The 1980s were the anomaly (chart A). The decline in real rates over the 1990s and early 2000s simply reflected a return to historical norms from an unusually high starting point. Further falls since 2008 are far more plausibly related to the financial crisis than secular trends.
Glenn Hoggarth, Carsten Jung and Dennis Reinhardt.
Supporters of financial globalisation argue that global finance allows investors to diversify risks, it increases efficiency and fosters technology transfer. The critics point to the history of financial crises which were associated with booms and busts in capital inflows. In our recent paper ‘Capital inflows – the good, the bad and the bubbly’, we argue that the risks depend on the type of capital inflow, the type of lender and also the currency denomination of the inflows. We find that equity inflows are more stable than debt, foreign banks are more flighty than non-bank creditors, and flows denominated in local currency are more stable than in foreign currency. We also find evidence that macroprudential policies can make capital inflows more stable.
Yuliya Baranova, Carsten Jung and Joseph Noss.
There has been a recent increase in awareness of investors that limiting emissions to prevent climate change might leave a substantial proportion of the world’s carbon reserves unusable, and that this could lead to revaluations across a range of financial assets. If risks are left unaddressed, this could result in large losses for some investors. But is this adjustment in financial market prices likely to be abrupt? And – even if it is – is it likely to pose risks to financial stability? We argue that the answer to both these questions could be yes: financial valuations can move sharply even if the transition to sustainable energy were smooth. And exposures are sufficiently large to warrant attention from both investors and policymakers.
Gene Kindberg-Hanlon and David Young.
The volume of world trade is now 17% below where it would be had it grown at pre-crisis trend after 2011. This post argues that most of this gap can be explained by weakness in world GDP, but stalling expansion in global value chains (GVCs) is playing an increasingly important role. We also argue that this shortfall can’t be explained by shifts in the geographical or the expenditure split of global GDP growth. While world trade grew twice as quickly as world GDP pre-crisis, it is likely to grow at about the same rate as world GDP in the future. This matters: weak trade could explain half of the 1pp fall in annual global productivity growth since the crisis.
“Too slow for too long”, referring to global GDP growth, was the title of a recent IMF publication. But is world economic growth really that slow? Looking at the data over the past several decades, global growth since the crisis does not appear particularly weak; at least not in a historical perspective
Dan Wales and Emil Iordanov.
Have FOMC discussions changed since the end of 2015? Are the committee more concerned about international risks now?
Government debt as a share of GDP is at its highest since WWII in advanced economies and since the 1980s debt crises in emerging markets, but so far, apart from Greece, Ukraine and some high-profile close calls in the euro area, this level of debt has caused barely a stir in financial markets. So is it okay to stop worrying?
Energy is the fundamental currency of the physical world, while GDP is the imperfect catch-all measure of economic progress. The plot shows electricity generation per capita against GDP per capita for 2015. The bubble areas represent population size, while the colours are the fraction of power which is produced from renewable sources – with light green a high percentage and dark green a low percentage.