PART I: Global Prospects and Issues PART II: Do Financial Crises Have Lasting Effects on Trade? |

PART I: Global Prospects and Issues PART II: Do Financial Crises Have Lasting Effects on Trade?


The recovery remains geographically uneven. In many advanced economies, activity is still sluggish and unemployment high, while legacy problems in the financial system remain unresolved. Activity is more robust in many emerging and developing economies. However, their prospects also depend on a healthy, broad-based recovery among the advanced economies, owing to deep real and financial linkages. The key policy challenge is to effect a smooth transition from public- to private-sector-led growth in many advanced economies, and from external to domestically driven growth in key emerging economies. While short-term macroeconomic policies are broadly appropriate, completing the two rebalancing acts will require tackling the medium-term fiscal, financial, and structural challenges raised by the crisis. Without such reform, growth driven by accommodative macroeconomic policies could sputter, with grave economic and social consequences.
We examine trade dynamics following banking and debt crises, to help us understand how trade might evolve for economies recently affected by such crises. Imports of the crisis economy tend to fall substantially in the short term—beyond what would be expected from the decline in output—and they stay depressed through the medium term. In contrast, exports of the crisis economy are not as badly affected. These findings suggest that the recovery of import demand in the United States and much of Western Europe may be even more anemic than suggested by their relatively weak projected output recoveries. Thus, the narrowing of the large current account deficits of some crisis countries such as the United States that occurred in 2009 may prove to be quite durable. For economies that experience a crisis, the chapter underscores the importance of embracing structural reforms to help support the recovery of output and trade. For economies that rely heavily on external demand for their growth, the chapter’s findings highlight the urgency of reorienting growth by strengthening domestic demand.

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International Monetary Fund World Economic Outlook Team

Friday, 29 October 2010
3.30 p.m. - 5.00 p.m.

Seminar Room 3-1
Level 3, Manasseh Meyer
Lee Kuan Yew School of Public Policy
469C Bukit Timah Road
Singapore 259772

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