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Productivity growth--the key driver of living standards--fell sharply following the global financial crisis and has remained sluggish since, adding to a slowdown already in train before. Building on new research, this note finds that the productivity slowdown reflects both crisis legacies and structural headwinds. In advanced economies, the global financial crisis has led to "productivity hysteresis"--persistent productivity losses from a seemingly temporary shock. Behind this are balance sheet vulnerabilities, protracted weak demand and elevated uncertainty, which jointly triggered an adverse feedback loop of weak investment, weak productivity and bleak income prospects. Structural headwinds--already blowing before the crisis--include a waning ICT boom and slowing technology diffusion, partly reflecting an aging workforce, slowing global trade and weaker human capital accumulation. Reviving productivity growth requires addressing remaining crisis legacies in the short run while pressing ahead with structural reforms to tackle longer-term headwinds.
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Large fiscal financing needs, both in advanced and emerging market economies, have often been met by borrowing heavily from domestic banks. As public debt approached sustainability limits in a number of countries, however, high bank exposure to sovereign risk created a fragile inter-dependence between fiscal and bank solvency. This paper presents a simple model of twin (sovereign and banking) crisis that stresses how this interdependence creates conditions conducive to a self-fulfilling crisis.
Business & Economics --- Economic Theory --- Financial crises. --- Banks and banking. --- Agricultural banks --- Banking --- Banking industry --- Commercial banks --- Depository institutions --- Crashes, Financial --- Crises, Financial --- Financial crashes --- Financial panics --- Panics (Finance) --- Stock exchange crashes --- Stock market panics --- Finance --- Financial institutions --- Money --- Crises --- Banks and banking --- Bank loans --- Financial crises --- Risk --- Debts, Public --- Econometric models --- E-books --- Debts, Government --- Government debts --- National debts --- Public debt --- Public debts --- Sovereign debt --- Debt --- Bonds --- Deficit financing --- Economics --- Uncertainty --- Probabilities --- Profit --- Risk-return relationships --- Bank credit --- Loans --- Banks and Banking --- Financial Risk Management --- Money and Monetary Policy --- Public Finance --- Industries: Financial Services --- Financial Markets and the Macroeconomy --- Money Supply --- Credit --- Money Multipliers --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Crises --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Debt Management --- Sovereign Debt --- Economic & financial crises & disasters --- Monetary economics --- Public finance & taxation --- Nonbank financial institutions --- Domestic debt --- Financial services industry --- Argentina
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Over the past two decades, most emerging market economies witnessed two key developments. A marked process of financial integration with the rest of the world, arguably turning these economies more vulnerable to global financial shocks; and an improvement of macroeconomic fundamentals, helping to increase their resiliency to these shocks. Against a backdrop of these opposing forces, are these economies more vulnerable to global financial shocks today than in the past? Have better fundamentals offset increasing financial integration? If so, what fundamentals matter most? We address these questions by examining the role of these two forces over the past two decades in amplifying or buffering the economic impact of these shocks. Our findings show that EMEs, with the exception of Emerging Europe, have become less vulnerable. Exchange rate flexibility and external sustainability are key determinants of the impact of these shocks, while the extent to which deeper financial integration is a source of vulnerability depends on the exchange rate regime.
Management --- Business & Economics --- Management Styles & Communication --- Financial risk. --- Financial crises. --- Crashes, Financial --- Crises, Financial --- Financial crashes --- Financial panics --- Panics (Finance) --- Stock exchange crashes --- Stock market panics --- Business risk (Finance) --- Money risk (Finance) --- Crises --- Risk --- Financial crises --- Capital movements --- Foreign exchange administration --- Econometric models --- E-books --- Foreign exchange --- Capital flight --- Capital flows --- Capital inflow --- Capital outflow --- Flight of capital --- Flow of capital --- Movements of capital --- Balance of payments --- International finance --- Exports and Imports --- Finance: General --- Foreign Exchange --- Financial Markets and the Macroeconomy --- Financial Aspects of Economic Integration --- International Business Cycles --- Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation --- General Financial Markets: General (includes Measurement and Data) --- International Investment --- Long-term Capital Movements --- International Lending and Debt Problems --- Finance --- Currency --- International economics --- Financial integration --- Exchange rate flexibility --- Emerging and frontier financial markets --- Foreign assets --- External debt --- Financial markets --- External position --- Financial services industry --- Investments, Foreign --- Debts, External --- Greece
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We study the process of external adjustment to large terms-of-trade level shifts—identified with a Markov-switching approach—for a large set of countries during the period 1960–2015. We find that adjustment to these shocks is relatively fast. Current accounts experience, on average, a contemporaneous variation of only about ½ of the magnitude of the price shock—indicating a significant volume offset—and a full adjustment within 3–4 years. Dynamics are largely symmetric for terms-of-trade booms and busts, as well as for advanced and emerging market economies. External adjustment is driven primarily by offsetting shifts in domestic demand, as opposed to variations in output (also reflected in the response of import rather than export volumes), indicating a strong income channel at play. Exchange rate flexibility appears to have played an important buffering role during booms, but less so during busts; while international reserve holdings have been a key tool for smoothing the adjustment process.
Business cycles --- Business cycles. --- Economic cycles --- Economic fluctuations --- Cycles --- Econometric models. --- Exports and Imports --- Foreign Exchange --- Information Management --- Current Account Adjustment --- Short-term Capital Movements --- Open Economy Macroeconomics --- International Business Cycles --- Technological Change: Choices and Consequences --- Diffusion Processes --- Knowledge management --- International economics --- Currency --- Foreign exchange --- Technology transfer --- Current account --- Exchange rate arrangements --- Adjustment process --- Exchange rate flexibility --- Technology --- Balance of payments --- United States
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