Global Market Discipline during Recent Policy Tightening
| November 6, 2023
Financial market discipline, in the form of movements in yields charged on sovereign debt of emerging economies, during the 2021 onset of U.S. monetary policy tightening depended heavily on domestic economic conditions. This pattern matches yield movements during the 2013 taper tantrum. The pattern suggests that, while advanced economy policies can influence emerging market financial conditions, domestic policies such as government spending levels are also important. However, the differing responses for pandemic-related spending versus the overall current account suggest that markets distinguished between needed COVID-19 fiscal support and other spending.
The Bell Curve of Global CO2 Emission Intensity
Zoë Arnaut, Òscar Jordà, and Fernanda Nechio | October 16, 2023
Countries’ commitments to reduce carbon dioxide (CO2) emissions can have important implications for their economies. Data since the 1800s reveal that the amount of CO2 emissions generated for a given level of output follows a bell-shaped curve. Pairing this with projections of future economic growth can help in predicting future overall emissions. Comparing actual data with past projections for levels of emission intensity reveals that reductions have been slower than predicted over the past 40 years. This divergence highlights the challenges many countries may face in reaching their emissions targets.
Global Supply Chain Pressures and U.S. Inflation
Zheng Liu and Thuy Lan Nguyen | June 20, 2023
Global supply chain disruptions following the onset of the COVID-19 pandemic contributed to the rapid rise in U.S. inflation over the past two years. Evidence suggests that supply chain pressures pushed up the cost of inputs for goods production and the public’s expectations of higher future prices. These factors accounted for about 60% of the surge in U.S. inflation beginning in early 2021. Supply chain pressures began easing substantially in mid-2022, contributing to the slowdown in inflation.
Supply Chain Disruptions, Trade Costs, and Labor Markets
Andrés Rodríguez-Clare, Mauricio Ulate, and Jose P. Vasquez | January 19, 2023
Global supply chain disruptions due to the COVID-19 pandemic have increased the costs of trade between countries. Given the interconnectedness of the U.S. economy with the rest of the world, higher trade costs can have important impacts on U.S. labor markets. A model of the U.S. economy that incorporates variation in industry concentrations across regions can help quantify these effects. The analysis suggests that recent global supply disruptions could cause a sizable and persistent reduction in labor force participation.
Are Inflation Expectations Well Anchored in Mexico?
Remy Beauregard, Jens H.E. Christensen, Eric Fischer, and Simon Zhu | January 17, 2023
Price inflation has increased sharply since early 2021 in many countries, including Mexico. If sustained, high inflation in Mexico could raise questions about the ability of its central bank to bring inflation down to its 3% inflation target. However, analyzing the difference between market prices of nominal and inflation-indexed government bonds suggests investors’ long-term inflation expectations in Mexico are close to the central bank’s inflation target and are projected to remain so in coming years.
COVID-19 Fiscal Expansion and Inflation Expectations in Japan
Jens H.E. Christensen and Mark M. Spiegel | August 3, 2022
The Japanese government’s strong response to the economic fallout from COVID-19 presents an opportunity to examine whether expansionary fiscal policies raise long-term inflation expectations. Analyzing market-based estimates of long-term inflation expectations in Japan shows that announcements of government fiscal stimulus under COVID-19 had no meaningful impact on investors’ long-term inflation expectations. This illustrates the challenge of moving long-term expectations after they become anchored below a central bank’s inflation target, as they have been in Japan.
Fiscal Multiplier at the Zero Bound: Evidence from Japan
Ethan Goode, Zheng Liu, and Thuy Lan Nguyen | May 24, 2021
The United States has implemented large-scale fiscal policy measures to help households and businesses cushion the economic fallout from the COVID-19 pandemic and to strengthen the recovery. The Federal Reserve has also supported the economy by keeping its policy rate at the zero lower bound. Evidence from Japan suggests that, in a sustained zero-bound environment, an unexpected increase in government spending has much larger and more persistent effects on real GDP, and even more so when the economy is in a recession.
Capital Flow Surges and Rising Income Inequality
Renuka Diwan, Zheng Liu, and Mark M. Spiegel | March 29, 2021
Surges of foreign investment into developing countries can amplify economic stress and potentially undermine their financial stability. New evidence suggests that excessive foreign capital inflows can also increase income inequality in emerging economies. Research shows that, as low global interest rates trigger more investment, those inflow surges benefit entrepreneurs by raising their returns, while lowering household earnings on bank deposits within the countries. The potential impact on income inequality provides another reason beyond financial stability for resisting abrupt surges in capital inflows.
Sudden Stops and COVID-19: Lessons from Mexico’s History
Gianluca Benigno, Andrew Foerster, Christopher Otrok, and Alessandro Rebucci | November 9, 2020
The COVID-19 pandemic produced a sharp contraction in capital flows in emerging markets during the spring of 2020. Such contractions are known as “sudden stops” and historically have been associated with significant downturns in a country’s economic activity. Evidence from Mexico’s financial crisis history suggests that sudden stops tend to exhibit a common pattern: the crisis lasts one to two years before a rapid but partial recovery, followed by years of protracted stagnation.
How Severe Is China’s Slowdown? Evidence from China CAT
John Fernald, Neil Gerstein, and Mark Spiegel | October 7, 2019
China’s official GDP shows that its pace of economic growth has slowed gradually since 2010 but remains remarkably high, around 6%. A new index, the China Cyclical Activity Tracker, or China CAT, provides an alternative way to measure fluctuations in Chinese economic activity using a weighted average of several non-GDP indicators. The index suggests that economic activity has slowed noticeably since 2017 to a pace slightly below trend. GDP growth statistics appear excessively smooth over recent years, but, as of mid-2019, are in line with the China CAT.
Are Workers Losing to Robots?
Sylvain Leduc and Zheng Liu | September 30, 2019
The portion of national income that goes to workers, known as the labor share, has fallen substantially over the past 20 years. Even with strong employment growth in recent years, the labor share has remained at historically low levels. Automation has been an important driving factor. While it has increased labor productivity, the threat of automation has also weakened workers’ bargaining power in wage negotiations and led to stagnant wage growth. Analysis suggests that automation contributed substantially to the decline in the labor share.
Negative Interest Rates and Inflation Expectations in Japan
Jens H.E. Christensen and Mark M. Spiegel | August 26, 2019
After Japan introduced a negative policy interest rate in 2016, market expectations for inflation over the medium term fell immediately. This can be seen by assessing how prices for Japanese bonds with embedded deflation protection responded to the policy announcement. The reaction stresses the uncertainty surrounding the effectiveness of negative policy rates as expansionary tools when inflation expectations are anchored at low levels. Japan’s experience also illustrates the desirability of taking preemptive steps to avoid the zero interest rate bound.
Inflationary Effects of Trade Disputes with China
Galina Hale, Bart Hobijn, Fernanda Nechio, and Doris Wilson | February 25, 2019
Imports from China are an important part of overall U.S. imports of consumer and investment goods. Thus, tariffs on these imports are likely to have sizable effects on consumer, producer, and investment prices in this country. Tariffs implemented thus far may have contributed an estimated 0.1 percentage point to consumer price inflation and 0.4 percentage point to price inflation for business investment goods. If implemented, an across-the-board 25% tariff on all Chinese imports would raise consumer prices an additional 0.3 percentage point and investment prices an additional 1.0 percentage point.
China’s Exchange Rate Policies and U.S. Financial Markets
Thomas M. Mertens and Patrick Shultz | October 2, 2017
Exchange rate stabilization or currency “pegs” are among the most prevalent interventions in international financial markets. Removing a peg to a safer currency can make the home currency more risky and less attractive to investors. When a country with market influence removes its peg from a safer country, the risk associated with holding either currency can be affected. Analyzing the effects of a scenario that changes a peg of the renminbi from the U.S. dollar to a basket of currencies suggests that China’s interest rates increase while U.S. interest rates decrease.
Forecasting China’s Role in World Oil Demand
Deepa D. Datta and Robert J. Vigfusson | August 21, 2017
Although China’s growth has slowed recently, the country’s demand for oil could be entering a period of faster growth that could result in substantially higher oil prices. Because Americans buy and sell oil and petroleum products in the global market, global demand prospects influence the profitability of U.S. oil producers and the costs paid by U.S. consumers. Analysis based on the global relationship between economic development and oil demand illustrates the prospects for Chinese oil demand growth and the resulting opportunities and challenges for U.S. producers and consumers.
Reserve Requirements as a Chinese Macro Policy Tool
Zheng Liu and Mark M. Spiegel | May 22, 2017
China’s central bank frequently adjusts its reserve requirements for commercial banks as a way to stabilize economic fluctuations. These adjustments affect the overall credit supply but can also lead to the reallocation of credit and capital. Evidence shows that increases in reserve requirements raise off-balance-sheet lending, which typically benefits China’s more productive private sector, at the expense of on-balance-sheet loans to less productive state-owned enterprises. Under certain conditions, reserve requirements can be a useful additional policy instrument for improving resource allocations and also for macroeconomic stabilization in China.
China’s IPO Activity and Equity Market Volatility
Frank Packer and Mark Spiegel | June 6, 2016
China has recently considered reforming its regulation of initial public offerings in equity markets. Current policy allows more IPOs in rising markets but restricts new issues in falling markets, possibly to avoid pushing down values of existing stocks. However, recent research finds China’s IPO activity has no effect on stock price changes, perhaps because of the low volume relative to the overall market. As such, cyclical restrictions on IPOs do not appear to have stabilized Chinese markets, so policy reforms may improve market efficiency without increasing volatility.
Global Fallout from China’s Industrial Slowdown
Mark Spiegel | November 23, 2015
China’s demand for imports helps support the global economic recovery, so China’s recent economic slowdown has caused international concern. China’s slowdown is concentrated in the industrial sector, while its emerging service sector has shown much new strength. However, China’s service sector is relatively closed and relies only modestly on imports. Accordingly, service sector growth is unlikely to offset the adverse implications of a slowing China for global trade.
Is China’s Growth Miracle Over?
Zheng Liu | August 10, 2015
The recent slowdown in China’s growth has caused concern about its long-term growth prospects. Evidence suggests that, before 2008, China’s growth miracle was driven primarily by productivity improvement following economic policy reforms. Since 2008, however, growth has become more dependent on investment and overall growth has slowed. If the recent reform plans can successfully address the country’s structural imbalances, China could maintain a solid growth rate that might help smooth its transition to high-income status.
Has China’s Economy Become More “Standard”?
John G. Fernald, Eric Hsu, and Mark M. Spiegel | October 6, 2014
Financial liberalization in China has broad implications, including changing how its central bank’s monetary policy affects the nation’s economy. An estimate of Chinese economic activity and inflation based on a broad set of indicators suggests that the way policy is transmitted to China’s economy has become more like Western market economies in the past decade. Although Chinese monetary policy may actually have exacerbated its economic downturn during the global financial crisis, a move toward stimulatory policy has helped ease its slower growth more recently.
Prospects for Asia and the Global Economy: Conference Summary
Reuven Glick and Mark M. Spiegel | September 2, 2014
A new volume, Prospects for Asia and the Global Economy, summarizes the 2013 Asia Economic Policy Conference hosted by the Federal Reserve Bank of San Francisco’s Center for Pacific Basin Studies. The conference focused on challenges faced by policymakers in advanced and emerging economies as they continue to recover from the recent global financial crisis. Issues discussed included the monetary policy spillovers from advanced economies to emerging markets, the costs and benefits of foreign reserve accumulation, and the desirability of macroprudential interventions, restrictions on cross-border capital flows, and financial regulatory reforms to reduce the likelihood of future crises.
Home Currency Issuance in Global Debt Markets
Galina B. Hale, Peter Jones, and Mark M. Spiegel | August 18, 2014
Historically, businesses in most countries have not been able to sell bonds denominated in their home currencies to foreign investors. In recent decades this trend has been changing. Research shows that bonds denominated in currencies other than the major global currencies have increased, particularly following the global financial crisis. However, not all countries were affected equally. Countries that were able to take advantage of the temporary disruption and near-zero interest rates in global financial markets were the ones with a combination of low government debt and a history of stable inflation.
Job Uncertainty and Chinese Household Savings
Zheng Liu | February 3, 2014
China’s household saving rate has risen substantially during the past two decades. Research suggests that increased job uncertainty following reforms and massive layoffs in state-owned enterprises during the late 1990s contributed significantly to the increase. Facing higher unemployment risks after the reforms, workers in state-owned enterprises have tended to save more as a precaution. A recent study estimates that precautionary saving driven by the reforms explains about a third of Chinese urban household wealth accumulation from 1995 to 2002.
On the Reliability of Chinese Output Figures
John Fernald, Israel Malkin, and Mark Spiegel | March 25, 2013
Some commentators have questioned whether China’s economy slowed more in 2012 than official gross domestic product figures indicate. However, the 2012 reported output and industrial production figures are consistent both with alternative Chinese indicators of the country’s economic activity, such as electricity production, and trade volume measures reported by non-Chinese sources. These alternative domestic and foreign sources provide no evidence that China’s economic growth was slower than official data indicate.
External Shocks and China’s Monetary Policy
Zheng Liu and Mark M. Spiegel | December 13, 2012
China prohibits its private sector from freely trading foreign assets and tightly manages currency exchange rates. In the wake of the recent global financial crisis, interest rates on China’s foreign assets fell sharply, while yields on Chinese domestic assets remained relatively high, posing a challenge for China’s monetary policy. Opening the capital account would improve China’s capacity to weather external shocks, such as sudden declines in foreign interest rates. However, allowing the exchange rate to float without removing capital controls is less effective.
Is China Due for a Slowdown?
Israel Malkin and Mark M. Spiegel | October 15, 2012
Many analysts have predicted that a Chinese economic slowdown is inevitable because the country is approaching the per capita income at which growth in other countries began to decelerate. However, China may escape such a slowdown because of its uneven development. An analysis based on episodes of rapid expansion in four other Asian countries suggests that growth in China’s more developed provinces may slow to 5.5% by the close of the decade. But growth in the country’s less-developed provinces is expected to run at a robust 7.5% pace.
Asia’s Role in the Post-Crisis Global Economy
Reuven Glick and Mark M. Spiegel | August 13, 2012
In the wake of the global financial crisis of 2007–08, Asia has emerged as a pillar of financial stability and economic growth. A recent San Francisco Federal Reserve Bank conference focused on Asia’s changing role in the global economy. Asia’s relative strength is allowing it to play an expanded part in multilateral responses to the European sovereign debt crisis. And the reforms put in place following the 1997 Asian financial crisis offer models for countries currently trying to stabilize their economies.
The U.S. Content of “Made in China”
Galina Hale and Bart Hobijn | August 8, 2011
Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label. Although the fraction is higher when the imported content of goods made in the United States is considered, Chinese imports still make up only a small share of total U.S. consumer spending. This suggests that Chinese inflation will have little direct effect on U.S. consumer prices.
Could We Have Learned from the Asian Financial Crisis of 1997-98?
Galina Hale | February 28, 2011
Economists drew a number of lessons from the Asian financial crisis of 1997-98 for preventing such episodes or mitigating their effects. Some of those are similar to lessons drawn from the global financial crisis of 2007-09. But differences in economic development and sophistication of the financial systems of East Asian countries compared with those of the United States and Western Europe made it difficult to apply the lessons of the earlier crisis.
What Is China’s Capital Seeking in a Global Environment?
Titan Alon, Galina Hale and João Santos | March 22, 2010
China is becoming increasingly active in international markets for mergers and acquisitions. Chinese acquirers are buying stakes in foreign companies to get access to resources, markets, and technology, among other reasons. With China’s expanding wealth and vast foreign exchange resources, further growth in the volume and variety of foreign direct investment is likely.
Asia and the Global Financial Crisis: Conference Summary
Reuven Glick and Mark M. Spiegel | March 15, 2010
“Asia and the Global Financial Crisis,” the first Asia Economic Policy Conference of the Federal Reserve Bank of San Francisco’s Center for Pacific Basin Studies, examined the impact of the crisis on Asian nations and the responses of policymakers. Although nations in the region were deeply affected, they generally recovered more quickly and vigorously than other industrial and emerging markets thanks to strong economic fundamentals and reforms enacted following financial crises in the 1990s.
Hong Kong and China and the Global Recession
Janet L. Yellen | February 8, 2010
Hong Kong and China are recovering impressively from global recession thanks to effective stimulus programs. But authorities worry that expansionary U.S. monetary policy may fuel asset bubbles in their economies. In the long run, the recession may nudge China toward increased domestic consumption by highlighting the risks of export-driven development. This Letter is adapted from a report by the president and CEO of the Federal Reserve Bank of San Francisco on her visit to Hong Kong and China November 15-21, 2009. Each year, the president of the San Francisco Fed joins the Federal Reserve governor responsible for liaison with Asia on a fact-finding trip to the region, in keeping with the Bank’s objective of developing expertise on issues related to the Pacific Basin.
Interprovincial Inequality in China
Christopher Candelaria, Mary Daly, and Galina Hale | April 10, 2009
Over the past 30 years, China has transformed itself, posting extraordinary rates of growth and increasing the living standards of nearly all its citizens. At the same time, China has become a far less equal nation, with vast differences emerging between those living in rural versus urban areas, inland versus coastal areas, and globally oriented versus more insular areas.
2008 Annual Pacific Basin Conference: Summary
Reuven Glick | March 13, 2009
This Economic Letter summarizes the papers presented at the 2008 Annual Pacific Basin conference held September 19-20, 2008, at the Federal Reserve Bank of San Francisco under the sponsorship of the Bank’s Center for Pacific Basin Studies. Conference papers are listed at the end and are available online.
Economic Conditions in Korea and Japan: A Monetary Policymaker’s Report
Janet L. Yellen | December 19, 2008
Each year, the President of the San Francisco Fed joins the Federal Reserve Board Governor responsible for liaison with Asia on a “fact-finding” trip to the region. These trips advance the Bank’s broad objectives of serving as a repository of expertise on economic, banking, and financial issues relating to the Pacific Basin and of building ties with policymakers and economic officials there.
Did Large Recalls of Chinese Consumer Goods Lower U.S. Imports from China?
Christopher Candelaria and Galina Hale | June 13, 2008
In the latter half of 2007, the media were full of stories about recalls of consumer goods produced in China, with the majority related to high concentrations of lead used in the paint for toys. The volumes and the values of the affected goods were large; for example, the value of toy industry recalls totaled almost 20% of the overall monthly import of toys and related products from China.
Are Global Imbalances Due to Financial Underdevelopment in Emerging Economies?
Diego Valderrama | April 11, 2008
Though much of the current discussion about global imbalances focuses on the swelling current account deficit in the U.S., the other side of this imbalance itself presents a puzzle. Specifically, the increase in U.S. international liabilities must be matched by an increase in assets elsewhere, and, in the current environment, a prominent “elsewhere” is among emerging Asian economies.
Economic Conditions in Singapore and Vietnam: A Monetary Policymaker’s Report
Janet L. Yellen | February 22, 2008
Each year, the President of the San Francisco Fed joins the Federal Reserve Board Governor responsible for liaison with Asia on a “fact-finding” trip to the region. These trips advance the Bank’s broad objectives of serving as a repository of expertise on economic, banking, and financial issues relating to the Pacific Basin and of building ties with policymakers and economic officials there.
Does Pegging Increase International trade?
Ramon Moreno | September 29, 2000
The currency crises of the 1990s appeared to reinforce the view that, in the long run, all currency pegs are unsustainable. And yet, pegged regimes maintain their attraction. For example, Calvo and Reinhart (2000) find evidence that many countries intervene to smooth fluctuations in the exchange rate even while they claim to be floating.