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Symposium 2014

Proposal - The Potential of Macroeconomic Surveillance

The Challenge

Recent debt, currency, or banking crises have proven how difficult it is to forecast such events, let alone to prevent them. For example, the fiscal surveillance mechanism in the Euro Area was unabl ...

Recent debt, currency, or banking crises have proven how difficult it is to forecast such events, let alone to prevent them. For example, the fiscal surveillance mechanism in the Euro Area was unable to prevent the Euro debt crisis, still faced by some EU countries. Consequently, the EU and the G-20 have called for strengthening macroeconomic surveillance by means of closely monitoring a broad set of potential imbalance indicators. However, many issues with regard to macroeconomic surveillance are still hotly debated among economists and policymakers. Analyzing the potential of macroeconomic surveillance and developing forward-looking proposals for its improvement, could certainly contribute to a more stable economic system in the future.

Global coordination is the key to effective macroeconomic surveillance.

The recent economic crisis has underscored the tremendous interconnectedness of the world’s financial systems and economies. It is therefore increasingly impossible, even for strict “sovereignists” and the eternal doubters, to address locaI problems with national solutions. These days, national problems can easily turn into global ones.

Consider, for example, that the global trade-to-GDP ratio has risen from 14 percent in 1970 to nearly 60 percent by 2012, according to the World Bank. That sounds good and dynamic – and it has also been growth-enhancing. However, it also entails complexities of this greater integration.

On top of rapidly growing interconnectedness through trade, we also need to consider the rapidly rising level of financial integration. According to the McKinsey Global Institute, global financial assets grew from $56 trillion in 1990 to $225 trillion by Q2 2012[1], 3 times the global GDP.

Paradoxically, this interconnectedness through trade and financial flows makes the global economy both stronger and more vulnerable. If managed well, it is sure to contribute to the growing wealth of nations – higher growth, more jobs, and elimination of income disparities among nations. But as the global financial crisis has vividly illustrated, because of this inter-connected in cross-border trade and transmission of capital flow shocks, many countries experienced sharp contraction in economic activity.

In network analysis, which is fittingly used in epidemiology to learn how viruses spread, our global economic system would be described as robust, but also fragile.

Policymakers around the globe are rightfully worried about policy transmissions across many dimensions – and in many directions. The exit from quantitative easing monetary policies of the United States Federal Reserve is one example. A hard-landing in China and the threat of disinflation/”lowflation” in the Euro Zone are some other examples that may create significant spill overs to open economies around the world.

This indicates that policy-makers should not only better understand the various feedback loops of their decisions, actions and inactions, but that also an effective macroeconomic surveillance system is required.

There is, therefore, no doubt that global macroeconomic environment should be monitored very closely and policy-makers should understand the market conditions clearly and be ready to implement appropriate policy measures to first and foremost reduce their own vulnerabilities – which is a central part of effective macro surveillance.

Furthermore, the systemic dimension of effective macro surveillance has to do with coordination and cooperation. Taking the special characteristics of each and every country into account, effective macroeconomic surveillance should be reciprocal, impartial, accurate, transparent and fair. Therefore, international coordination and cooperation would appear to be central to the effective management of macroeconomic surveillance.

These coordination efforts cannot just be episodic. International macro policy coordination usually occurs spontaneously in turbulent periods. When the global economy faces crises, key players seek to coordinate their efforts. But in quieter times, actually the moment when decision makers have bandwidth to deal with long-term choices and tough trade-offs, such coordination is quickly neglected.

The important point we need to keep in mind is this: Crisis management, by its very nature, is always reactive. Risk management, in contrast, should be highly proactive.

It is imperative that a comprehensive global macroeconomic surveillance framework is pursued with rigor. Getting there will take an effort that is as Herculean as it is Cartesian.

Powerful interests will have to be taken on in many a nation – and not just in what some still consider the top of the “global pyramid,” the United States.

To coordinate policy and cushion against shocks, we need to closely monitor a set of potential risk factors, ideally on the basis of a set of standardized indicators. Next, we have to identify linkages between these indicators and their effects across countries. Preventive and/or corrective action plans should be constructed through international coordination. Sanctions for non-compliant countries should be agreed to in advance in order to ensure that countries adopt proper policy measures. That is a very tall order, no doubt.



[1] http://www.mckinsey.com/insights/global_capital_markets/financial_globalization: Retreat or reset?

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