International Macroeconomics in the Wake of the Global Financial Crisis

The recent dismal productivity growth in the U.S. and in the global economy has been seen as evidence of a potential return to a period of secular stagnation. Focusing on the U.S.—a proxy for the frontier economy—we consider a standard decomposition of the different sources of post-World War II growth of GDP per capita, and review existing projections. In the next 20–50 years, lower contributions of hours worked and education will negatively affect U.S. economic growth. However, total factor productivity—which some warn will also continue to stagnate—will be key. After showing that similar warnings have been issued after all deep recessions, we argue that such pessimistic predictions were consistently misguided—not because they were built on erroneous theories or data, nor because they failed to predict the discovery of new technologies, but because they underestimated the potential of the technologies that already existed. These findings suggest that we should not make the same mistake today by undervaluing the future effects of current information technology.

We examine the growth performance of six emerging economies (Brazil, China, India, Indonesia, Russia and Turkey) over the last two decades to discuss whether domestic structural constraints are affecting their present and future growth potential. In order to better assess the determinants of the recent synchronized slowdown of these economies, we concentrate on the dynamics of labour productivity and of employment. We find that the ongoing slowdown in EMEs is largely structural, but there is still ample room for catching up in terms of output composition, reallocation of labour across sectors and within-sector productivity improvements. The scope for further reform and reform priorities differs across countries. In the longer run other structural factors will weigh on potential growth, particularly the evolution of the size and quality of the labour force.

This chapter builds upon the related research that grapples with determinants of TFP, as the driving force of potential growth. In particular, we empirically estimate, in a homogenous and systematic manner, cross-country contributions of cyclical and structural determinants of aggregate TFP growth. Under a growth accounting framework, we compute TFP growth estimates for 41 economies over the 1992–2014 period. After selecting its main drivers by means of a Bayesian Model Averaging (BMA) approach, we exploit panel estimates to conclude that a substantial share of the growth underperformance in recent years was related to cyclical factors, mainly the output gap, but also: (i) over-indebtedness for advanced economies; and (ii) the decline in commodity prices for commodity exporters. In addition, the growth of IT capital and the convergence towards the technological frontier appear to be significant structural drivers of TFP productivity growth in emerging market economies.

This chapter reviews the current debate on inequality with a focus on the main global trends and their likely causes. Notwithstanding significant progress, data challenges still limit the degree of confidence one should have on the evidence concerning the evolution of inequality between and, especially, within countries. Finding common causes for the heterogeneous experiences across countries might be unfounded, however it is important to focus on the two main overarching explanations proposed in the literature for the recent evolution of inequality, technology and trade. These two elements are surely and everywhere important drivers of inequality, although their interaction with each country’s institutions and policies is an equally relevant factor.

In 2011–2016 global trade volumes systematically surprised on the downside, to a much larger extent than real GDP; in other words, the income elasticity of trade declined and was lower than expected. This finding has generally been interpreted as evidence of the importance of structural factors in determining the weakness of international trade. However, as income elasticity is itself a cyclical variable, the role of cyclical factors has been underestimated. Once the cyclicality of the elasticity is correctly accounted for, it turns out that cyclical forces have provided the main contribution to the unexpected weakness of trade. In addition, the accuracy of existing forecasts on trade growth can be significantly improved by using real-time information about business conditions, given that a large share of the forecast error depends on mispredicted income elasticities.

This chapter documents why US private consumption, while remaining the key engine of US growth, slowed after the financial crisis. To this purpose, we estimate an error-correction model for US consumption, accounting for the role of household debt flows before and after the crisis. Contrary to an analysis carried out in terms of net wealth, a decomposition of households’ assets and liabilities shows how the pre-crisis period was characterized by an excessive indebtedness, which was both a source of short-term growth and of financial instability. In the current “new normal” situation, private consumption cannot rely on debt flows as much as before the crisis. This is, therefore, an important “demand-side” explanation for the much-debated low growth recovery.

Business investment could be dampened by weak aggregate demand, the high cost of capital and macroeconomic uncertainty. The importance of each factor may vary both over time and across countries. In this chapter we use a panel of advanced economies to estimate a model of business investment based on the above mentioned factors. The main objective is to understand, through time-varying parameters estimations, how their relative importance has changed over time, in particular after the global financial crisis. The analysis reveals that all three factors matter for investment, and suggests a key role for countercyclical policies aiming at lowering interest rates, supporting aggregate demand, and restoring confidence on financial markets against unfavorable macroeconomic and financial developments, such as those that followed the global financial crisis and the debt crisis.

The world economy is plagued by uncertainties of various kinds from economic policy uncertainty to financial volatility. This chapter presents the main measures for uncertainty referred to in policy debates, explains how uncertainty affects the macro-economy and draws three lessons for policy-makers facing increasing uncertainties. First, macroeconomic policies have a direct role to play in stabilizing policy-related uncertainty. Second, financial uncertainty should be constrained through financial regulation. Third, the effectiveness of economic stabilization policies depends on the state of uncertainty and should be adapted accordingly.

In this chapter we look at global inflation trends over the last decade and try to disentangle factors that could explain the ultra-low levels of inflation during the recovery from the Great Recession. We review the literature on the subject, which points at possible structural shifts in price and wage setting processes in recent decades, such as changes in inflation’s cyclical sensitivity to economic slack, in the role being played by forward-looking and backward-looking inflation expectations, or in the relevance of global factors. We then test empirically whether changes in the coefficients of the Phillips curve in the wake of the global financial crisis can explain the behaviour of inflation over this period for a large group of advanced economies. Our results show a wide range of variation between countries, and in some cases the findings are insufficiently robust to offer a satisfactory explanation of the recent course of inflation. Nevertheless, the persistence of inflation and the increased importance of backward-looking inflation expectations in some countries may pose risks for inflation-expectation anchoring and central bank credibility. Finally, we review the adverse effects on the real economy of ultra-low inflation over an extended period and analyse the policy options for addressing this problem.

There is ample evidence that real interest rates have progressively declined and converged since the 1980s in most advanced and emerging economies, to stand currently at very low levels. The persistence of this trend and its intensification during the global financial crisis have raised a series of highly relevant issues in different areas. We follow a conceptual framework where global real interest rates are determined by the supply of (saving) and the demand for (investment) loanable funds at the global level. Against this background, this chapter analyses the determinants of this trend from a global perspective highlighting how globalisation and increasing financial integration, contributed to increase the influence of the emerging market economies since the beginning of this century. In the wake of the global financial crisis other factors in place were the subsequent reduction in the propensity to invest, the increase in precautionary saving, the introduction of non-standard monetary policies or the increase in income inequality. Looking forward, this chapter argues that the normalisation of monetary policies, the change in the growth model of certain emerging countries and the socio-demographic and productivity trends would point to a gradual recovery in real interest rates over a medium-term horizon, albeit with a high degree of uncertainty. Over the longer term, this trend may tail off against a background of limited technological progress or a sharper-than-expected decline in investment in the emerging economies.

Exchange rate fluctuations have been particularly large since mid-2014, with the nominal effective exchange rate of the Dollar appreciating 22% between July 2014 and December 2016, well above normal fluctuation range. This article attempts to measure the impact of currency appreciation on domestic activity, accounting for the source of fluctuations. More specifically, by using the multi-country structural model NiGEM, we show that different types of exchange rate shocks can have different macroeconomic outcomes. Focusing on the period going from mid-2014 to December 2016, we show that the initial appreciation of the Dollar (from July 2014 to April 2015), coming from activity gaps and divergence in monetary policy expectations, choke 0.3 pp off US GDP growth, while the following phase of the currency appreciation, stemming from a fall in the Dollar risk premium would have been neutral, and even slightly positive, to US growth. When comparing the US with the euro area as regards the impact on growth, we get that the euro area is more sensitive than the US to a currency appreciation. As a result, a sustained rise in the currency could prove more challenging for the Euro area than for the US.

This chapter documents recent trends in international financial flows, based on a newly assembled dataset covering 40 advanced and emerging countries. Specifically, we compare the period since 2012 with the pre-crisis period and highlight three key stylized facts. First, the “Great Retrenchment” that took place during the crisis has proved very persistent, and world financial flows are now down to half their pre-crisis levels. Second, this fall can be related predominantly to advanced economies, especially those in Western Europe, while emerging markets, except Eastern European countries, have been less severely affected until recently. Third, not all types of flows have shown the same degree of resilience, resulting in a profound change in the composition of international financial flows: while banking flows, which used to account for the largest share of the total before 2008, have collapsed, foreign direct investment flows have been barely affected and now represent about half of global flows. Portfolio flows stand between these two extremes, and within them equity flows have proved more robust than debt flows. This should help to strengthen resilience and deliver genuine cross-border risk-sharing. Having highlighted these stylized facts, this chapter turns to possible explanations for and likely implications of these changes, regarding international financial stability issues.

Among the non-standard monetary measures used by the European Central Bank (ECB), asset purchase programmes (APPs) have been gaining increasing importance in the last couple of years, accounting for about half of total assets in the Eurosystem’s balance sheet as of late 2016. This chapter aims to gauge the impact of the ECB’s APPs on the financial markets of a set of Central, Eastern and South Eastern European (CESEE) economies. We find that the APPs implementation contributed to supporting cross-border portfolio investment flows to, and foreign bank claims into, CESEE economies mainly in an indirect way—i.e. through their impact on certain liquidity and financial condition indicators in the euro area—therefore revealing the existence of both a portfolio rebalancing and a banking liquidity channel of transmission. Without such non-standard monetary measures, both types of cross-border capital flows would have been weaker and financial conditions in CESEE economies more stringent than they actually were. In fact, we also show that the implementation of the ECB’s APPs had the effect of lowering both policy and long-term interest rates to levels well below those predicted on the basis of similarities in business cycles or global risk factors. These effects may not have been entirely unwelcome during the recent period of sub-par growth and unusually low inflation, but may pose relevant policy challenges going forward, against the background of a cyclical divergence between CESEE countries and the euro area economy.