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Overview: Adjustment in the aftermath of the Global Crisis 2008–09: New global order?
Journal of International Money and Finance 52 (2015) 1e3
Contents lists available at ScienceDirect
Journal of International Money and Finance journal homepage: www.elsevier.com/locate/jimf
Editorial
Overview: Adjustment in the aftermath of the Global Crisis 2008e09: New global order?*
The Global Financial Crisis [GFC] imposed major challenges on the Global Economy. While the crisis ended the illusive Great Moderation, only time will tell us the degree to which it will lead to a new global order. Pertinent issues exposed by the crisis include the cost and benefit of delaying adjustment and rebalancing, the desirability of fiscal policy at times of growing public debt, the benefits and costs of capital controls and prudential regulations, the role of cross border banking, the desirability of hoarding reserves, and the like. To gain a better understand of these issues, a conference under the auspices of the Journal of International Money and Finance, was held on April 18e19, 2014, at the University of Southern California. This Special Issue provides the refereed proceedings of the keynote address and nine selected papers presented in the conference, which dealt with the Adjustment in the Aftermath of the Global Crisis 2008e09. The main insights of these papers are outlined as below. 1. Adjustment at times of peril The keynote address by Frieden, “The Political Economy of Adjustment and Rebalancing,” points out that debt and balance of payments crises are politically controversial. In the aftermath of such crises, conflict typically breaks out over how the burden of adjustment will be distributed. There is international conflict, between debtor nations and creditor nations, over how outstanding debts will be resolved. And there is conflict within nations, over who will make the sacrifices necessary to get economies back on track. These political conflicts often become so bitter and protracted that they impede productive bargaining over the adjustment process. The characteristics of socio-economic and political divisions within societies affect the battles over economic adjustment, as well as who will emerge victorious from these battles, and how difficult it may be to arrive at a productive resolution of the crisis. The study “Fiscal Multipliers in Expansion and Recession: Does It Matter Whether Government Spending is Going Up or Down” by Riera-Crichton, Vegh, and Vuletin, applies non-linear methods, showing that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. For industrial countries, the problem originates in the fact that it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the ‘true’ long-run multiplier for bad * Sponsored by USC Dockson Chair in Economics and International Relations, USC Center for International Studies, USC Economics Department and the School of International Relations, and the Federal Reserve Bank of San Francisco.
http://dx.doi.org/10.1016/j.jimonfin.2014.11.009 0261-5606/© 2014 Elsevier Ltd. All rights reserved.
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Editorial / Journal of International Money and Finance 52 (2015) 1e3
times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In “Drivers of Structural Change in Cross-Border Banking Since the Global Financial Crisis” Bremus and Fratzscher analyze the effects of changes to regulatory policy and to monetary policy on crossborder bank lending since the GFC. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Their results suggest that expansionary monetary policy in the source countries e as measured by the change in reserves held at central banks - has encouraged cross-border lending, both in euro area and non-euro area countries. Increases in financial supervisory power or independence of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of cross-border bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis. In “Financial Crises and the Composition of Cross-Border Lending” Cerutti, Hale and Minoiu examine the composition and drivers of cross-border bank lending between 1995 and 2012, distinguishing between syndicated and non-syndicated loans. They show that on-balance sheet syndicated loan exposures, which account for almost one third of total cross-border loan exposures, increased during the global financial crisis due to large drawdowns on credit lines extended before the crisis. Their empirical leads to three main results. First, banks with lower levels of capital favor syndicated over other kinds of cross-border loans. Second, borrower country characteristics such as level of development, economic size, and capital account openness, are less important in driving syndicated than non-syndicated loan activity, suggesting a diversification motive for syndication. Third, information asymmetries between lender and borrower countries became more binding for both types of cross-border lending activity during the recent crisis. Bergman and Hutchison's study “The End of the Great Moderation? Challenges to Economic Stability in Emerging Markets in the Post-Crisis Era” evaluates fiscal rules and their effectiveness in helping dampen the pro-cyclical nature of fiscal policies. Typically, it is better that fiscal rules be counter-cyclical, in order to offset business cycle shocks. Bergman and Hutchison use a dynamic panel framework for a large number of countries, including emerging, developing, and advanced countries. They find that national fiscal rules are highly effective in reducing the pro-cyclicality of government expenditure policies. 2. International liquidity and capital flows Aizenman, Cheung and Ito evaluate in “International Reserves Before and After the Global Crisis: Is There No End to Hoarding?” the impact of the global financial crisis and recent structural changes on hoarding international reserves (IR). They find that gross saving is associated with higher IR in developing and emerging markets, and confirm the negative impact of outward direct investment and swap agreements on IR accumulation. Macro-prudential policies tends to complement IR accumulation, while the presence of sovereign wealth funds motivates developed countries to hold a lower level of IR. re, Cheng, Chinn and In “For a Few Dollars More: Reserves and Growth in Times of Crises” Bussie Lisack examine whether the accumulation of foreign exchange reserves served to mitigate the negative impact of the 2008e09 global downturn on economic growth in emerging and developing economies. Using a broad sample of countries, they find that the level of reserves matters: countries with high reserves relative to short-term debt suffered less from the crisis, particularly when associated with a less open capital account. This suggests some degree of complementarity between reserve accumulation and capital controls. Government-directed, or official financial flows have exploded over the past 15 years, at the same time that some countries have run substantial current account surpluses. In “Official Financial Flows, Capital Controls, and Global Imbalances” Bayoumi, Gagnon, and Saborowski use a cross-country panel framework to analyze the effects of net official flows on current accounts. The authors find that net official flows have large and persistent effects on current account balances. They also find that the impact of net official flows is importantly affected by the extent of capital mobility. Net official flows have a larger effect on the current account when capital mobility is low.
Editorial / Journal of International Money and Finance 52 (2015) 1e3
3
3. Case studies In “Japanese Monetary Policy and International Spillovers” Dekle and Hamada present a simple monetary model with sticky prices to highlight spillovers to output gaps. Using a sequence of vector autoregressions, they show the effects of monetary policies measured using short-term interest rates and monetary base shocks. They conclude that money base expansions in Japan have had generally positive output effects both within Japan and in the U.S., despite the depreciation of the yen. Nearly thirty years after the 1985 publication of Carlos Díaz-Alejandro's classic article, “Good-Bye Financial Repression, Hello Financial Crash” Pastor and Wise evaluate whether an alternative system avoiding many of the inefficiencies of financial repression and blending both public and private financial agents has been achieved. The authors use the 2008-09 Global Financial Crisis as a lens through which to examine the policymaking capabilities of six Latin American countries. They conclude that the greater success that several of the countries experienced during the 2008e09 financial shocks was due to institutional modernization that facilitated policy learning and a more business-friendly climate; and, to improvements in income distribution that may have facilitated consensus-building, thereby giving policymakers the latitude to employ more nuanced fiscal and financial policies. The studies in this volume raise pertinent questions regarding the Adjustment in the Aftermath of the Global Crisis. Our hope is that they will motivate continuing research on these topics. Joshua Aizenman*, Menzie Chinn, Robert Dekle USC and the NBER, University of Wisconsin and the NBER, USC, USA Corresponding author. E-mail address: [email protected] (J. Aizenman) Available online 2 December 2014
Contents lists available at ScienceDirect
Journal of International Money and Finance journal homepage: www.elsevier.com/locate/jimf
Editorial
Overview: Adjustment in the aftermath of the Global Crisis 2008e09: New global order?*
The Global Financial Crisis [GFC] imposed major challenges on the Global Economy. While the crisis ended the illusive Great Moderation, only time will tell us the degree to which it will lead to a new global order. Pertinent issues exposed by the crisis include the cost and benefit of delaying adjustment and rebalancing, the desirability of fiscal policy at times of growing public debt, the benefits and costs of capital controls and prudential regulations, the role of cross border banking, the desirability of hoarding reserves, and the like. To gain a better understand of these issues, a conference under the auspices of the Journal of International Money and Finance, was held on April 18e19, 2014, at the University of Southern California. This Special Issue provides the refereed proceedings of the keynote address and nine selected papers presented in the conference, which dealt with the Adjustment in the Aftermath of the Global Crisis 2008e09. The main insights of these papers are outlined as below. 1. Adjustment at times of peril The keynote address by Frieden, “The Political Economy of Adjustment and Rebalancing,” points out that debt and balance of payments crises are politically controversial. In the aftermath of such crises, conflict typically breaks out over how the burden of adjustment will be distributed. There is international conflict, between debtor nations and creditor nations, over how outstanding debts will be resolved. And there is conflict within nations, over who will make the sacrifices necessary to get economies back on track. These political conflicts often become so bitter and protracted that they impede productive bargaining over the adjustment process. The characteristics of socio-economic and political divisions within societies affect the battles over economic adjustment, as well as who will emerge victorious from these battles, and how difficult it may be to arrive at a productive resolution of the crisis. The study “Fiscal Multipliers in Expansion and Recession: Does It Matter Whether Government Spending is Going Up or Down” by Riera-Crichton, Vegh, and Vuletin, applies non-linear methods, showing that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. For industrial countries, the problem originates in the fact that it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the ‘true’ long-run multiplier for bad * Sponsored by USC Dockson Chair in Economics and International Relations, USC Center for International Studies, USC Economics Department and the School of International Relations, and the Federal Reserve Bank of San Francisco.
http://dx.doi.org/10.1016/j.jimonfin.2014.11.009 0261-5606/© 2014 Elsevier Ltd. All rights reserved.
2
Editorial / Journal of International Money and Finance 52 (2015) 1e3
times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In “Drivers of Structural Change in Cross-Border Banking Since the Global Financial Crisis” Bremus and Fratzscher analyze the effects of changes to regulatory policy and to monetary policy on crossborder bank lending since the GFC. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Their results suggest that expansionary monetary policy in the source countries e as measured by the change in reserves held at central banks - has encouraged cross-border lending, both in euro area and non-euro area countries. Increases in financial supervisory power or independence of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of cross-border bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis. In “Financial Crises and the Composition of Cross-Border Lending” Cerutti, Hale and Minoiu examine the composition and drivers of cross-border bank lending between 1995 and 2012, distinguishing between syndicated and non-syndicated loans. They show that on-balance sheet syndicated loan exposures, which account for almost one third of total cross-border loan exposures, increased during the global financial crisis due to large drawdowns on credit lines extended before the crisis. Their empirical leads to three main results. First, banks with lower levels of capital favor syndicated over other kinds of cross-border loans. Second, borrower country characteristics such as level of development, economic size, and capital account openness, are less important in driving syndicated than non-syndicated loan activity, suggesting a diversification motive for syndication. Third, information asymmetries between lender and borrower countries became more binding for both types of cross-border lending activity during the recent crisis. Bergman and Hutchison's study “The End of the Great Moderation? Challenges to Economic Stability in Emerging Markets in the Post-Crisis Era” evaluates fiscal rules and their effectiveness in helping dampen the pro-cyclical nature of fiscal policies. Typically, it is better that fiscal rules be counter-cyclical, in order to offset business cycle shocks. Bergman and Hutchison use a dynamic panel framework for a large number of countries, including emerging, developing, and advanced countries. They find that national fiscal rules are highly effective in reducing the pro-cyclicality of government expenditure policies. 2. International liquidity and capital flows Aizenman, Cheung and Ito evaluate in “International Reserves Before and After the Global Crisis: Is There No End to Hoarding?” the impact of the global financial crisis and recent structural changes on hoarding international reserves (IR). They find that gross saving is associated with higher IR in developing and emerging markets, and confirm the negative impact of outward direct investment and swap agreements on IR accumulation. Macro-prudential policies tends to complement IR accumulation, while the presence of sovereign wealth funds motivates developed countries to hold a lower level of IR. re, Cheng, Chinn and In “For a Few Dollars More: Reserves and Growth in Times of Crises” Bussie Lisack examine whether the accumulation of foreign exchange reserves served to mitigate the negative impact of the 2008e09 global downturn on economic growth in emerging and developing economies. Using a broad sample of countries, they find that the level of reserves matters: countries with high reserves relative to short-term debt suffered less from the crisis, particularly when associated with a less open capital account. This suggests some degree of complementarity between reserve accumulation and capital controls. Government-directed, or official financial flows have exploded over the past 15 years, at the same time that some countries have run substantial current account surpluses. In “Official Financial Flows, Capital Controls, and Global Imbalances” Bayoumi, Gagnon, and Saborowski use a cross-country panel framework to analyze the effects of net official flows on current accounts. The authors find that net official flows have large and persistent effects on current account balances. They also find that the impact of net official flows is importantly affected by the extent of capital mobility. Net official flows have a larger effect on the current account when capital mobility is low.
Editorial / Journal of International Money and Finance 52 (2015) 1e3
3
3. Case studies In “Japanese Monetary Policy and International Spillovers” Dekle and Hamada present a simple monetary model with sticky prices to highlight spillovers to output gaps. Using a sequence of vector autoregressions, they show the effects of monetary policies measured using short-term interest rates and monetary base shocks. They conclude that money base expansions in Japan have had generally positive output effects both within Japan and in the U.S., despite the depreciation of the yen. Nearly thirty years after the 1985 publication of Carlos Díaz-Alejandro's classic article, “Good-Bye Financial Repression, Hello Financial Crash” Pastor and Wise evaluate whether an alternative system avoiding many of the inefficiencies of financial repression and blending both public and private financial agents has been achieved. The authors use the 2008-09 Global Financial Crisis as a lens through which to examine the policymaking capabilities of six Latin American countries. They conclude that the greater success that several of the countries experienced during the 2008e09 financial shocks was due to institutional modernization that facilitated policy learning and a more business-friendly climate; and, to improvements in income distribution that may have facilitated consensus-building, thereby giving policymakers the latitude to employ more nuanced fiscal and financial policies. The studies in this volume raise pertinent questions regarding the Adjustment in the Aftermath of the Global Crisis. Our hope is that they will motivate continuing research on these topics. Joshua Aizenman*, Menzie Chinn, Robert Dekle USC and the NBER, University of Wisconsin and the NBER, USC, USA Corresponding author. E-mail address: [email protected] (J. Aizenman) Available online 2 December 2014