MGI Report: Global flows in a digital age: How trade, finance, people, and data connect the world economy

Today, the movement of goods, services, finance, and people has reached previously unimagined levels. Global flows are creating new degrees of connectedness among economies—and playing an ever-larger role in determining the fate of nations, companies, and individuals; to be unconnected is to fall behind.

MGI  scenarios show that global flows could reach $54 trillion to $85 trillion by 2025, more than double or triple their current scale.

The study finds that countries with a larger number of connections in the global network of flows increase their GDP growth by up to 40 percent more than less connected countries do. The penalty for being left behind is rising.

MGI’s new Connectedness Index ranks 131 countries on total flows of goods, services, finance, people, and data and communication, adjusting for country size. The index shows that developed economies remain more connected than emerging ones: Germany tops the list, followed by Hong Kong and the United States. Emerging economies are less connected to global flows, but some are climbing up the ranks rapidly: Morocco and Mauritius gained 26 places and 28 places, respectively, between 1995 and 2012—the largest increases in our index. Saudi Arabia rose 19 places, reflecting the rising value of oil exports and the recycling of oil wealth into global financial markets. India gained 16 places in this period, thanks to growth in services flows, and Brazil jumped 15 on the strength of expanding services and financial flows.

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Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets

Abstract

This paper analyses the implications of macroeconomic policy interactions for financial stability, proxied by financial assets prices (equity and bonds). The empirical analysis applies a Vector Autoregressive (VAR) model and findings suggest that an accommodating monetary, and disciplined fiscal, stance has
been optimal for both stock and bond markets. There is also ample evidence of interdependence between policies, as an expansionary fiscal policy could persuade the monetary authorities to adopt an accommodating stance, whereas a contractionary monetary policy leads fiscal policy towards consolidation. The interrelation between monetary and fiscal policy necessitates coordination between them for the sake of financial stability.

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Macroeconomics Discipline at the Cross-Roads

Abstract


The 2008 financial crisis of the US was a watershed for economics discipline, especially macroeconomics. Several world leaders such as the Queen of England questioned distinguished economists of Ivey league schools such as the London School of Economics on why they failed to see what was happening and had not prevented the crisis through policy advice? Most did not have an answer. Why? One of the reasons is the supply side economics, which is also called Monetarism; and the Chicago School of Economics, which advocates that free markets function efficiently and self-regulate; and at best governments should tinker with monetary policy of money supply; has become the dominant intellectual basis for policy making for the last forty years. Models of this kind failed to predict the financial crisis because they are based on strong assumptions.
The lesson from the financial crisis is that macroeconomic models have to incorporate financial markets and account for asymmetric information, transaction costs and moral hazard behaviour of economic agents. Governments have to regulate especially the financial markets. Free market fundamentalist will ask the question as to why one should expect the government agents to do a better job than private agents because they are also subject to moral hazard behaviour of using tax payers’ money. One answer to this is that if a large number of private agents act autonomously, the sum of average transaction and information costs of markets is higher than if one large agent pools these costs and realizes economies of scale. Government does this job- the tax collected from each agent could be lower than the average information and transaction costs of private agents. As far as the moral hazard behaviour of government agents is concerned, it is a political economy issue of designing and implementing institutions.

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Global Economic Prospects - June 2013: Less volatile, but slower growth

The global economy is transitioning into what is likely to be a smoother and less volatile period. However, the recovery is uneven. For high-income countries, fiscal consolidation, high unemployment and still weak consumer and business confidence will continue to dampen growth this year, while growth in the developing world will be solid but weaker than during the pre-crisis boom period.

Although the challenges faced by high-income countries to restore financial-sector health, reform institutions and get fiscal policy back onto a sustainable path persist, the likelihood that these challenges will provoke a major crisis has declined markedly.

Global GDP is expected to expand about 2.2 percent this year and strengthen to 3.0 percent and 3.3 percent in 2014 and 2015. For high-income countries, growth this year will be a modest 1.2 percent, firming to 2.0 percent in 2014 and 2.3 percent by 2015.

Developing-country GDP is now projected to be around 5.1 percent in 2013, strengthening to 5.6 percent and 5.7 percent in 2014 and 2015, respectively. Growth in several middle income countries has been held back by supply bottlenecks and is unlikely to reach pre-crisis rates unless supply-side reforms are pursued vigorously. In China also, growth has slowed as authorities seek to rebalance the economy. Looking at broader region-wide trends, East Asia is expected to grow by 7.3 percent this year; developing Europe and Central Asia by 2.8 percent; Latin America by 3.3 percent; Middle East & North Africa (MENA) by 2.5 percent; South Asia by 5.2 percent and Sub-Saharan Africa by 4.9 percent.


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Low Interest Rate Policy and the Use of Reserve Requirements in Emerging Markets

This paper attempts to shed light on the link between monetary policy in large economies with international currencies (the United States and the euro area) and the use of reserve requirements in emerging markets.

Using reserve requirement data for 28 emerging markets from 1998 to 2012 this paper provides evidence that emerging markets tend to raise reserve requirements and repress financial markets to curb speculative capital inflows when interest rates in the major economies decline.

The finding suggests that the current low interest rate policies of the major economies may have collateral effects on emerging markets by triggering financially repressive policies....

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