With the benefit of hindsight, this paper provides a fresh and comprehensive look at the causes of the 2014–16 collapse in oil prices and its impact on the global economy. It disentangles the contribution of supply and demand factors, assesses the impact on activity in oil exporters and oil importers, and reviews policy responses in these countries. The main conclusions are: (i) the decline in oil prices was predominantly triggered by supply factors, particularly rapid efficiency gains in U.S. shale oil production, but softening demand prospects played a substantial role as well; (ii) the short-term benefits of falling oil prices for the global economy were muted by economic rebalancing in China, a low responsiveness of activity in other oil-importing emerging markets, and a sharp slowdown in U.S. investment as energy sector activity declined and a the U.S. dollar strengthened; (iii) oil exporters with flexible exchange rates and relatively large fiscal buffers fared better than others, but most oil-exporting economies still face significant policy challenges as their medium-term prospects for growth and fiscal revenues have deteriorated; (iv) fundamental changes in the oil market make a return to the oil price levels of the early 2010s unlikely, pointing to the need for accelerated reforms, particularly among oil exporters.
The Global Cost of Protectionism (December 2017)
This paper quantifies the wide-ranging costs of potential increases in worldwide barriers to trade in two scenarios. First, a coordinated global withdrawal of tariff commitments from all existing bilateral/regional trade agreements, as well as from unilateral preferential schemes coupled with an increase in the cost of traded services, is estimated to result in annual worldwide real income losses of 0.3 percent or US$211 billion relative to the baseline after three years. An important share of these losses is likely to be concentrated in regions such as East Asia and Pacific and Latin America and the Caribbean which together account for close to one-third of the global decline in welfare. Highlighting the importance of preferences, the impact on global trade is estimated to be more pronounced, with an annual decline of 2.1 percent or more than US$606 billion relative to the baseline if these barriers stay in place for three years. Second, a worldwide increase in tariffs up to legally allowed bound rates coupled with an increase in the cost of traded services would translate into annual global real income losses of 0.8 percent or more than US$634 billion relative to the baseline after three years. The distortion to the global trading system would be significant and result in an annual decline of global trade of 9 percent or more than US$2.6 trillion relative to the baseline in 2020.
Asset Prices and Macroeconomic Outcomes: A Survey (November 2017)
This paper surveys the literature on the linkages between asset prices and macroeconomic outcomes. It focuses on three major questions. First, what are the basic theoretical linkages between asset prices and macroeconomic outcomes? Second, what is the empirical evidence supporting these linkages? And third, what are the main challenges to the theoretical and empirical findings? The survey addresses these questions in the context of four major asset price categories: equity prices, house prices, exchange rates and interest rates, with a particular focus on their international dimensions. It also puts into perspective the evolution of the literature on the determinants of asset prices and their linkages with macroeconomic outcomes, and discusses possible future research directions.
Macroeconomic Implications of Financial Imperfections: A Survey (November 2017)
This paper surveys the theoretical and empirical literature on the macroeconomic implications of financial imperfections. It focuses on two major channels through which financial imperfections can affect macroeconomic outcomes. The first channel, which operates through the demand side of finance and is captured by financial accelerator-type mechanisms, describes how changes in borrowers’ balance sheets can affect their access to finance and thereby amplify and propagate economic and financial shocks. The second channel, which is associated with the supply side of finance, emphasises the implications of changes in financial intermediaries’ balance sheets for the supply of credit, liquidity and asset prices, and, consequently, for macroeconomic outcomes. These channels have been shown to be important in explaining the linkages between the real economy and the financial sector. That said, many questions remain.
A Cross-Country Database of Fiscal Space (August 2017)
This paper presents a comprehensive cross-country database of fiscal space, broadly defined as the availability of budgetary resources for a government to service its financial obligations. The database covers up to 200 countries over the period 1990–2016, and includes 28 indicators of fiscal space grouped into four categories: debt sustainability, balance sheet vulnerability, external and private sector debt related risks as potential causes of contingent liabilities, and market access. The authors illustrate potential applications of the database by analyzing developments in fiscal space across three time frames: over the past quarter century; during financial crises; and during oil price plunges. The main results are as follows. First, fiscal space had improved in many countries before the global financial crisis. In advanced economies, following severe deteriorations during the crisis, many indicators of fiscal space have virtually returned to levels in the mid-2000s. In contrast, fiscal space has shrunk in many emerging market and developing economies since the crisis. Second, financial crises tend to coincide with deterioration in multiple indicators of fiscal space, but they are often followed by reduced reliance on short-term borrowing. Finally, fiscal space narrows in energy-exporting emerging market and developing economies during oil price plunges but later expands, often because of procyclical fiscal tightening and, in some episodes, a recovery in oil prices.
Arm's-length Trade: A Source of Post-Crisis Trade Weakness (July 2017)
Trade growth has slowed sharply since the global financial crisis. U.S. trade data highlights that arm's-length trade—trade between unaffiliated firms—accounts disproportionately for the overall post-crisis trade slowdown. This is partly because arm's-length trade depends more heavily than intra-firm trade on emerging market and developing economies (EMDEs), where output growth has slowed sharply from elevated pre-crisis rates, and on sectors with rapid pre-crisis growth that boosted arm's-length trade pre-crisis but that have languished post-crisis. Compounding such compositional effects, arm's-length trade is also more sensitive to changes in demand and real exchange rates. For example, the income elasticity of arm's-length exports is about one-fifth higher than that of intra-firm exports. Hence, post-crisis global growth weakness has weighed more on arm's-length trade than on intra-firm trade. Unaffiliated firms may also have been hindered more than multinational firms by constrained access to finance during the crisis, heightened policy uncertainty, and their typical firm-level characteristics.