[Economic Report of the President (2010)]
[Administration of Barack H. Obama]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 3

CRISIS AND RECOVERY
IN THE WORLD ECONOMY


The financial crisis and recession have affected economies around the
globe. The impact on the U.S.economy has been severe,but many areas of
the world have fared even worse. The average growth rate of real gross
domestic product (GDP) around the world was -6.2 percent at an annual
rate in the fourth quarter of 2008 and -7.5 percent in the first quarter of 2009. All told, the world economy is expected to have contracted 1.1 percent in 2009 from the year before-the first annual decline in world output in
more than half a century.1  Although economic dislocations have been
severe in one region or another at various times over the past 50
years, never in that time span has the annual output of the entire
global economy contracted. But, as bad as the outcome has been, the
decline would likely have been far larger if policy makers in the
world's key economies had not acted forcefully to limit the impact of
the crisis.
The global economic crisis started as a financial crisis,
generally beginning in housing-related asset markets, and accelerated
in the fall of 2008. After September 2008, interbank interest rates
spiked, exchange rates shifted quickly, and the flows of capital across
borders slowed dramatically. Trade flows also plummeted, falling even
more dramatically than GDP. As a result, trade flows became a key
transmission mechanism in the crisis, spreading macroeconomic distress
to countries that were not primarily exposed to the financial shocks.
Policymakers around the world responded quickly, sometimes
taking coordinated action, sometimes acting independently. Many central
banks
___________________________________
/1/ Quarterly figures are calculations of the Council of Economic
Advisers based on a 64-country sample that represents 93 percent of
world GDP. Annual average projections are from the International
Monetary Fund (2009a). These projections indicate that from the fourth
quarter of 2007 to the fourth quarter of 2008, world GDP contracted
0.1 percent, and from the fourth quarter of 2008 to the fourth quarter of 2009, world GDP expanded 0.8 percent. The contraction was strongest from
the middle of 2008 to the middle of 2009; hence the annual average growth
from 2008 to 2009 (-1.1 percent) is lower than the fourth-quarter-to-
fourth-quarter numbers.

cut interest rates nearly to zero and expanded their balance sheets to
try to stimulate lending and keep their economies going. They also lent
large sums to one another to prevent dislocations caused by a lack of
foreign currency in some markets. Beyond the central bank actions,
governments intervened more broadly in banks and financial markets as well. Governments also spent large sums in fiscal stimulus to avoid massive
drop-offs in aggregate demand. In a welcome development, they did not, however, restrict trade in an attempt to turn away imports.
The global economy is now seeing the beginnings of recovery.
Financial markets have rebounded, trade is recovering, and GDP growth
rates are again positive. Recovery is far from complete or certain, and
some risks remain: lending is still constrained, and unemployment is
painfully high. But, at the start of 2010, the world economy is no
longer at the edge of collapse, and the elements of a sound recovery
seem to be coming into place.


International Dimensions of the Crisis

The worldwide contraction had roots in many financial phenomena,
and its rapid spread can be seen in a number of financial indicators.
Borrowing costs increased, U.S. dollars were scarce in foreign markets,
and exchange rates moved rapidly. Yet, despite problems in U.S.
financial markets, there was no U.S. dollar crisis, and while currency
markets moved rapidly, many of the emerging-market currency
depreciations were temporary and not accompanied by cascading defaults.
Thus, the world economy was better positioned for recovery than it might
have been.

Spread of the Financial Shock

One of the early indicators of the crisis was the large spike in
the interest rate banks charge one another that took place as the value
of assets held on bank balance sheets came into question. After the
investment bank Lehman Brothers declared bankruptcy in September 2008,
banks grew even warier about lending to each other. This fear of
lending to one another can be seen by comparing the interbank lending
rate with the risk-free overnight interest rate. Similar to the TED
spread, the Libor-OIS spread (the London interbank offered rate minus
the overnight indexed swap) gives such a comparison for dollar loans,
and comparable spreads are available for loans in other currencies. As
Figure 3-1 shows, the spike in spreads for dollar loans was larger
earlier, but the increase in interbank lending rates was sharp in
dollars, pounds, and euros alike. Banks simply refused to lend to one
another at low rates in these major financial systems. Furthermore,
concerns about which firms might go bankrupt sent the cost of insuring




against a default on a bond soaring. Thus, costs of borrowing increased
for even creditworthy borrowers, putting a strain on the ability of firms
to finance themselves.
The Dollar Shortage. Beyond the difficulties of evaluating
counter-party risk were the acute shortages of dollar liquidity outside
the United States, which were reflected in a steep rise in the cost of
exchanging foreign currency for dollars for a fixed period of time (a
foreign currency swap). The reasons for the dollar shortage are
complex but can be understood by looking at foreign banks' behavior
before the crisis. During the boom years, non-U.S. banks acquired
large amounts of dollar-denominated assets, often paying for these
acquisitions with borrowed dollars rather than with their own
currency, thus avoiding the currency mismatch risk of borrowing in one
currency and having assets in another. Much of the dollar borrowing
was short term and came from U.S. money-market funds. After investors
began to pull their money out of these funds in the fall of 2008,that
source of lending dried up, and banks were left trying to obtain dollars
in other ways. This put pressure on the currency swap market.
Before the crisis, moreover, some banks funded purchases of
U.S. assets directly through swaps. In a simplified version of the
transaction, foreign banks borrow in their own currency (euros, for
example), exchange that currency for dollars through a swap, and then
use the dollars to buy U.S. assets. By using a swap market rather than
simply purchasing currency, they even out the currency risk (McGuire and
von Peter 2009), 2 but they are left with a funding risk. If no one will
lend them dollars when their swap is due, they may have to sell their
dollar assets (some of which may have fallen in value) to pay back the
dollars they owe. When banks became very nervous about taking on risk,
demand greatly increased the price of currency swaps.
Unwinding Carry Trades. As concerns about the stability of the
financial markets heightened over the course of 2008, investors
responded by trying to deleverage and reduce some of their exposed
risky positions. The desire to undo risky positions coupled with the
dollar shortage led to swift movements in currency markets, especially
an unwinding of the ``carry trade.'' In the carry trade, an investor
borrows money in a low-interest-rate currency (for example, the
Japanese yen), sells that currency for a higher-interest-rate currency
(for example, the Australian dollar), and invests the money in that
currency. If interest rates are 1 percent in Japan and 6 percent in
Australia, the investor stands to collect a 5 percent profit if
exchange rates do not move. Although economic theory suggests that
currency movements should offset this expected profit, over short
horizons, if the exchange rate does not move, investors can make a
profit. This happened in the mid-2000s, and the carry trade became a
favorite strategy for hedge funds and other investors.
The popularity of the trade became self-fulfilling as the
continued flows of money into higher-interest-rate currencies helped
them appreciate and made the trade even more profitable. But, as the
crisis hit, investors tried to reduce their risk and leverage. This
unwinding process meant rapid sales of high-interest-rate currencies
and rapid purchases of low-interest-rate currencies. Currencies that
had low interest rates and had been known as funding currencies (such
as the Japanese yen) rose rapidly in value, and the currencies of a
number of popular carry-trade destinations (such as Australia, Brazil,
and Iceland) depreciated swiftly. Thus, as the crisis hit, borrowing
became more expensive and currency markets were increasingly volatile.
The Dollar During the Crisis. Although in many ways the crisis
was triggered within U.S. asset markets, the response was not a run on
the U.S. dollar; instead the dollar strengthened notably. Some
observers had argued that the high U.S. current account deficit and
problems in the U.S. housing and other asset markets might lead to an
unwillingness to hold U.S. assets more broadly, which could have
triggered a depreciation of the dollar. But both the need for foreign
banks to cover their dollar borrowing and the need for other investors
to repay loans borrowed in dollars (including for carry trades)
generated strong demand for dollars. Further, the desire to
______________________________
2 The swap means they have borrowed dollars and lent euros. In this
way, they borrowed euros at home and lent them in the swap, and they
owe dollars in the swap but also own dollar assets. Thus, their
foreign currency position is balanced.

avoid risky investments at the height of the crisis led to a ``flight
to safety,'' with many investors buying dollars and U.S. Treasury bills.
As seen in Figure 3-2, the trade-weighted value of the dollar increased
18 percent from July 2008 to its peak in March 2009. The movement of
the dollar was broad-based, with sharp appreciations against most
major trade partners; the main exceptions were Japan, where the yen
appreciated even more against the world as the carry trade unwound, and
China, which had reestablished its peg to the dollar in July of 2008
and therefore had a stable exchange rate against the dollar.



Currency Volatility in Emerging Markets. The deleveraging and
fall in risk appetite contributed to large and in some cases sharp
swings in the currencies of many emerging economies, but the impact
of these large depreciations varied. Some of the sharpest depreciations,
such as those in Brazil, Korea, and Mexico, were largely temporary. The
currencies of all three countries depreciated more than 50 percent
against the dollar between the end of July 2008 and February 2009, but
by the end of November 2009 Korea's currency was down only 15 percent
and Brazil's only 12 percent. Mexico was still 29 percent below its
summer 2008 value.3
_______________________________
3 The starting point for comparison is important. Korea had been
depreciating in early 2008 as well, while Brazil and Mexico were
appreciating. Thus, by the end of November 2009, Brazil had
appreciated slightly from the start of 2008 while Korea had
depreciated 24 percent and Mexico 18 percent.

Some countries with large current account deficits faced more
pressure. The region with the sharpest declines in the value of its
currencies against the dollar was Eastern Europe, where the currencies
of Hungary, Poland, and Ukraine all depreciated more than 50 percent
between July 2008 and February 2009, and others depreciated nearly as
much. These large depreciations resulted in part from the strengthening
of the dollar against the euro, as many of these countries are closely
tied with Europe, but some of these currencies remained weak even when
other countries started to strengthen against the dollar.
A large depreciation can especially lead to broad damage in an
economy if there are negative balance-sheet effects. In this setting, a
country may have few foreign assets but extensive liabilities
denominated in foreign currency. As the exchange rate depreciates, the
foreign currency loans become more expensive in local currency. This
was particularly a concern in Eastern Europe, where many countries
borrowed substantially in foreign currency leading up to the crisis.
In Hungary, for example, many individuals took out mortgages in foreign
currency. The depreciation of the Hungarian forint thus put pressure on
both individuals and bank balance sheets. There was widespread concern
that the Western European banks, such as those in Austria, that had
made loans in Eastern Europe would face substantial losses. Both the
Organisation for Economic Co-operation and Development (OECD) and
the International Monetary Fund (IMF) warned of potentially serious
bank problems in Austria because of these concerns. By the end of
2009, however, those concerns had not materialized. Austria has had to
shore up its banks, but there has not been widespread contagion from
Eastern Europe.
During the peak of the crisis, the spreads on emerging-market
bonds spiked, but they returned toward more standard levels over time,
and outright financial collapse was avoided. There are a number of
reasons for the more contained impact of the exchange-rate movements
during the crisis. In the past decade, many developing countries have
reduced the currency mismatch on their balance sheets by borrowing less,
increasing their stocks of foreign exchange reserves, and shifting
away from debt finance (Lane and Shambaugh forthcoming). The improved
fiscal positions of some countries likely also helped, as did the
strong policy response and coordinationdescribedlater. Some vulnerable
countries also benefited from the strengthening of the IMF's lending
capabilities (discussed later). The failure of this shock to turn into
a series of deep sustained financial collapses across the emerging
world was a welcome development that left the world economy better
positioned for a quick turnaround.

The Collapse of World Trade

Despite this crisis's origins in the financial sector, trade
rapidly became a crucial source of transmission of the crisis around
the world. Exports collapsed in nearly every major trading country, and
total world trade fell faster than it did during the Great Depression
or any time since. From a peak in July 2008 to the low in February
2009, the nominal value of world goods exports fell 36 percent; the
nominal value of U.S. goods exports fell 28 percent (imports fell 38
percent) over the same period. Even countries such as Germany, which
did not experience their own housing bubble, experienced substantial
trade contractions, which helped spread the crisis. The collapse in
net exports in Germany and Japan contributed substantially to their
declines in GDP, helping drive these countries into recession. In the
fourth quarter of 2008, Germany's drop in net exports contributed
8.1 percentage points to a 9.4 percent decline in GDP (at an annual
rate); Japan's net exports contributed 9.0 percentage points to a 10.2
percent GDP decline. Real exports fell even faster in the first
quarter of 2009.
Figure 3-3 shows that the drop in the trade-to-GDP ratio during
this crisis, from 28 percent to 23 percent in OECD countries, is
unprecedented. Trade as a share of GDP had not dropped by more than 2
percentage points from the year before since at least 1970 (the
earliest available data), suggesting trade's drop relative to GDP has
been larger than in the past. Economists have noted that the
responsiveness of trade to GDP has been



rising over time. Three main reasons for the exceptionally large fall
in trade, even given the decline in GDP, have been suggested (Freund
2009; Levchenko, Lewis, and Tesar 2009; and Baldwin 2009).
The first reason is the use of global supply chains (or vertical
specialization), where parts of production are manufactured or
assembled in different countries and intermediate inputs are shipped
from country to country, often from one branch of a firm to another,
and then sent to a final destination for finishing. In this case, a
reduction in output of one car may involve a decrease in shipments far
larger than the final value of that single car. For example, a country
that imports $80 of inputs and adds $20 of value added before exporting
a $100 goodwill see GDP fall by $20 if demand for that good disappears,
but trade (measured as the average of imports and exports) will fall
$90. If the decline in demand was concentrated in goods where global
supply chains were particularly important, this could help account for
the large fall in trade-to-GDP ratios. Estimates are that imported
inputs account for, on average, 30 percent of the content of exports in
OECD and major emerging market countries, although there is variation
across countries within the OECD. Figure 3-4 shows that, with the
exception of Ireland, the percentage by which trade declined for a
country was



strongly correlated with the extent of that country's vertical
specialization (specifically defined as the degree of imported inputs
used in exports).
Second, the disruption in global financial markets may have
helped generate the trade collapse. Exporters typically require some
form of financing to produce their export goods because importers will
not pay for them before they arrive. Similarly, importers may need some
sort of financing to bridge the gap between when they need to pay for
goods and when they will be able to sell them on a domestic market.
When liquidity tightened in world financial markets, the cost of trade
finance increased. Little high-quality information is available for
trade finance because it is typically arranged by banks or from one
party to another, rather than through an organized exchange. The data
that do exist show a drop in trade finance, but one that is not
necessarily larger than the drop in overall trade. The drop in general
financing available for producers and consumers, along with the impact
of the recession on aggregate demand, may be factors as significant as
the specifics of trade finance.4
Finally, the types of products that are traded may have been a
critical factor in the trade collapse. Investment goods and consumer
durables make up a substantial portion of merchandise trade,
representing 57 percent of U.S. exports and 49 percent of U.S. imports
in 2006. In a recession, investment spending by firms and purchases of
durable goods by consumers often fall more sharply than other
components of GDP. Because these investment and purchasing decisions are
large and irreversible, they may be delayed until the economic situation
is more clear. The drop in spending in these categories during this
crisis has been far more severe than in previous recessions in the
past 30 years in the United States. Paralleling the movements in
overall demand, the collapse in the nominal value of trade was most
severe in capital and durable goods and in chemicals and metals, and
least severe in services and nondurable goods. The combination of the
concentration of the spending reduction in these sectors and the
sectors' importance in overall trade appears to be one source of the
sharp fall in trade in the crisis.

The Collapse in Financial Flows

Trade in goods was not the only international flow to collapse.
Financial trade evaporated in a way never before seen. U.S. outflows
and in flows of finance rose steadily for decades as increasingly
integrated capital markets grew in size and scope. By 2007, the
average monthly gross purchases and sales of foreign long-term assets
by American investors were
___________________________
4 See Mora and Powers (2009) for a discussion of trade finance in the
recent crisis. Levchenko, Lewis, and Tesar (2009) find no support for
the notion that trade credit played a role in the reduced trade flows
for the United States during the crisis.

$1.4 trillion, and foreigners' purchases and sales of U.S. long-term
assets were $4.9 trillion. Each group both bought and sold a
considerable amount of their holdings, so that net purchases by
Americans were $19 billion a month and net purchases by foreign
investors were $84 billion a month.
When the crisis hit, there was a massive deglobalization of
finance that was unprecedented and in many ways more extreme than the
collapse in goods and services trade. Figure 3-5 shows that the scale
of cross-border flows was cut in half after years of fairly steady
climbing. Net purchases by both home and foreign investors actually
became negative in the fall of 2008 (that is, there were more sales
than purchases). Americans pulled funds home at such a fast pace that
from July to November of 2008, Americans on net sold foreign assets
worth $143 billion. Foreign investors also liquidated their positions,
selling a net $92 billion in U.S. holdings. Hence, outflows from
foreign investors returning to their home markets were offset in part
by inflows from Americans bringing money back to the United States,
likely reducing the impact of the outflows.



The Decline in Output Around the Globe

While the triggers of the crisis are generally considered
financial in nature, these shocks were rapidly transmitted to the real
economy. What had been a financial market shock or a trade collapse
became a full-fledged recession in countries around the world. The
financial disruption was so strong and swift in most countries that
confidence fell as well. Confidence levels are measured in different
ways across countries, but they were generally falling throughout
2008 and reached recent lows in the fall of 2008 and winter of
2009. In many countries, confidence had not been so low in more than
a decade.
As noted, world GDP is estimated to have fallen roughly 1.1
percent in 2009 from the year before. The number for the annual average
masks the shocking depth of the crisis in the winter of 2000-09, when
GDP was contracting at an annual rate over 6 percent. In advanced
economies, the crisis was even deeper; the IMF expects GDP to have
contracted 3.4 percent in advanced economies for all of 2009. For OECD
member countries, GDP fell at an annual rate of 7.2 percent in the fourth
quarter of 2008 and 8.4 percent in the first quarter of 2009. Despite
the historic nature of its collapse, the U.S. economy actually fared
better than about half of OECD economies during those quarters.
Figure 3-6 shows the decline in industrial production across major
economies, with each of these economies in January 2009 more than 10
percent below its January 2008 level, and Japan faring far worse
relative to the other major economies.



Some emerging market countries collapsed as well, with
contractions at an annual rate of over 20 percent in Mexico, Russia,
and Turkey, but the collapses were brief-lasting only a quarter or so.
On average, the emerging and developing world was quite resilient to the
crisis and is projected to have continued to expand in 2009 at a
rate of 1.7 percent for the year (these countries contracted in
the first quarter, but they began growing quickly in the second
quarter). Some regions, such as developing Asia, continued to grow
at a robust pace for the year as a whole (over 6 percent), but even
that rate is considerably slower than their growth in the mid-2000s.
Figure 3-7 shows that industrial production fell in Brazil and Mexico
in a manner similar to that in industrial economies, but in China and
India it merely stalled for a brief period and then accelerated
again. This overall performance in the emerging world is a turnaround
from previous crises, where recessions in the advanced countries were
followed by sustained collapses in some emerging countries.

[GRAPHIC(S) NOT AVAILALBE IN TIFF FORMAT]

The combination of weak aggregate demand and falling energy
prices has meant that price pressure has been starkly absent in this
crisis. In fact, lower oil prices have meant that year-over-year
inflation numbers were negative in most major countries until toward the
end of 2009 (Figure 3-8). Core inflation rates-which exclude volatile
energy and food prices-have also been quite low over the year and even
negative in Japan. This lack of price pressure has left the world's
central banks with more flexibility than they had in the 1970s
recessions because they do not have pressing inflation problems to
consider. Inflation has also been muted in emerging and developing
countries relative to their history; it is estimated to be 5.5
percent over 2009 and is projected to fall slightly in 2010.
As economies and commodity markets strengthened toward the end of 2009,
inflation pressure grew in a limited number of countries but was not in
any way widespread.



Policy Responses Around the Globe

Given the severity of the downturn, it is not surprising that
policymakers responded with dramatic action. Central banks cut interest
rates, governments spent considerable sums in the form of fiscal
stimulus, and governments and central banks supported financial sectors
with funds and guarantees. Many of these actions were coordinated as
policymakers tried to prevent the financial market upheaval and
recession from becoming a full-fledged depression.

Monetary Policy in the Crisis

The response of monetary authorities was both strong and swift
across the globe. The major central banks coordinated a significant rate
cut of 50 basis points on October 8, 2008, in an attempt to increase
liquidity and to boost confidence by demonstrating that they were
prepared to act decisively. During the crisis, every member of the Group
of Twenty (G-20) major economies cut interest rates. By March 2009,
the Federal Reserve, the Bank of Japan, and the Bank of England had
all cut rates to 0.5 percent or less, with the Federal Reserve and the
Bank of Japan approaching the zero nominal lower bound. The European
Central Bank (ECB) responded slightly more slowly but still cut its
policy rate more than 3 percentage points to 1 percent by May 2009
(Figure 3-9).  Emerging market countries and major commodity
exporters, whose economies were growing fast in the summer of 2008,
moved as well, but not to the near-zero levels seen at the major
central banks.

[GRAPHIC(S) NOT AVAIABLE IN TIFF FORMAT]

Besides cutting interest rates, three of the largest central
banks used nonstandard monetary policy as well. As Figure 3-10 shows,
the Federal Reserve and the Bank of England more than doubled the size
of their balance sheets in 2008 (see Chapter 2 for more details on the
Federal Reserve's actions). The two banks bought large quantities of
assets, substantially increasing the supply of reserves, and made loans
against a variety of asset classes. The goal of these programs was to
free up credit in markets that were being underserved through purchases
of, or loans against, asset-backed securities and commercial paper. The
ECB also expanded its balance sheet substantially (37 percent) in 2008
and made loans against a variety of assets, but it did not undertake
the same level of quantitative easing as either the U.S. or U.K.
central banks. The Bank of Japan did not expand its balance sheet
on a similar scale.5  While it did expand some of its lending
programs in corporate bond markets, its policies were more oriented to
financial markets than to quantitative monetary policy. As noted
earlier, Japan's inflation rate has been negative.



As Figure 3-10 shows, the rapid growth of central bank balance
sheets halted during 2009, but the central banks have not withdrawn the
liquidity they injected into the system. Similarly, policy interest
rates have remained constant since December 2008 in the United States
and Japan and since the spring of 2009 in the euro area and the United
Kingdom. Some commodity producers and smaller advanced nations with
strong growth have begun to withdraw some monetary accommodation.
Australia, Israel, and Norway have all raised policy interest rates.
Also, authorities in countries such as China and India had not raised
main policy rates as of the end of 2009, but they have made
administrative changes that tightened lending to slow the expansion of
credit as their economies began to grow more quickly.
In addition to lending support, authorities directly intervened
to support the banking sectors in a number of countries. Countries took
many actions on their own, ranging from the policies pursued in the
United States such as the Troubled Asset Relief Program (discussed in
Chapter 2), to direct takeovers of some banks in the United Kingdom, to
the creation of other
_________________________
/5/ On December 1, 2009, the Bank of Japan announced a roughly $115
billion increase in lending, equivalent to a nearly 10 percent
increase in its balance sheet. This increase was significant but still
far below the actions taken by other major central banks.

entities to centralize some bad assets and clean the balance sheets of
other banks in Switzerland and Ireland, to general support and
guarantees in a wide range of countries.


Central Bank Liquidity Swaps

In addition to the coordination of rate cuts, one other
important form of international coordination took place across central
banks. As noted, a dollar funding shortage materialized abroad, as the
normal channels for the transmission of dollar liquidity from U.S.
markets to the global financial system broke down. This shortage
presented a unique set of challenges to central banks. They could have
simply provided domestic currency and left banks to sell it for dollars,
but the foreign exchange swaps market in which such transactions are
usually conducted was severely impaired. Alternatively, central banks
could have used dollar reserves to provide foreign currency funds, but
few advanced countries (outside of Japan) had sufficient foreign
currency holdings to fully address the foreign currency funding needs
of their banking systems.
Central banks whose currencies were in demand responded to the
shortage by providing large amounts of liquidity to partner central
banks through central bank liquidity swaps.6 In many of these
arrangements, the Federal Reserve purchased foreign currency in
exchange for U.S. dollars and at the same time agreed to return the
foreign currency for the same quantity of dollars at a specific date
in the future. When foreign central banks drew dollars in this way to
fund their auctions of dollar liquidity in local markets, the Federal
Reserve received interest equal to what the foreign central banks were
receiving on the lending operations. The Federal Reserve first used
these swaps in late 2007 on a relatively small scale. But, as shown in
Figure 3-11, from August 2008 through December 2008 these swaps
increased from $67 billion to $553 billion. This massive supply of
liquidity was larger than the available lending facilities of the IMF.
The United States extended this program to major emerging market
countries as well on October 29, 2008, providing lines of up to $30
billion each to Brazil, Mexico, Singapore, and Korea.
As the acute funding needs have subsided, nearly all of the
central bank swaps have been unwound, and the Federal Reserve has
announced that it anticipates that these swap arrangements will be
closed by February 1, 2010. There was no long-term funding cost to the
Federal Reserve from these swap lines; moreover, the Federal Reserve's
counterparties in these transactions were the central banks of other
countries, and the loans
_____________________________
/6/ See Fender and Gyntelberg (2008) for a more comprehensive
discussion.

were fully collateralized with foreign currency, so very little credit
risk was involved in these transactions.


[GRAPHIC(S) NOT IN AVAILABLE IN TIFF FORMAT]

Although the dollar funding shortages were unique, the Federal
Reserve was not the only central bank to provide swap lines. Some of the
more notable examples include the European Central Bank, which made
euros available to a number of central banks in Europe, among them the
central banks of Denmark, Hungary, and Poland, that felt pressure for
funding in euros; the Swedish central bank, which provided support to
central banks in the Baltics; and the Swiss National Bank, which
provided Swiss francs to the European Central Bank and Poland. Across
Asia there was renewed interest in the Chiang Mai Initiative, under
which various Asian central banks set up swap lines that could be used
in an emergency. Despite the increases in these cross-Asian country
swap lines, together they totaled $90 billion, far less than the
available Federal Reserve swap lines, and they were not drawn on
during the crisis. In sum, while existing institutional structures
(IMF lending or reserves) appear to have been insufficient to meet
this aspect of the crisis, the world's central banks innovated to take
temporary actions that quelled market disruptions and avoided even
sharper financial dislocation.

Fiscal Policy in the Crisis

In part because major central banks had pushed interest rates as
low as they could go and in part because of the magnitude of the crisis,
by the beginning of 2009, many countries decided to institute
substantial fiscal stimulus. The hope was that government spending
could step into the breach left by the collapse of private demand and
provide the necessary lift to prevent a slide into a deep recession or
worse.
Nearly every major country instituted stimulus, with the
exception of some countries hampered by substantial public finance
concerns, such as Hungary and Ireland. Every G-20 nation implemented
substantial stimulus, with an unweighted average of 2.0 percent of GDP
in 2009 (Table 3-1), and many other OECD nationsal so adopted stimulus
plans. Among G-20 countries, China, Korea, Russia, and Saudi Arabia
enacted the most extensive stimulus programs in 2009, all equivalent
to more than 3 percent of GDP. The U.S. stimulus in 2009 (estimated at
2 percent of GDP) was greater than the OECD's estimate of its member
country average (1.6 percent of GDP), but the same as the G-20 average
and not quite as extensive as the four high-stimulus nations.



Discretionary fiscal action was not the only form of fiscal
stimulus; automatic stabilizers (unemployment insurance, welfare,
reduction in taxes collected due to lower payrolls) are triggered when
an economy slows down. The size of automatic stabilizers present in an
economy appears to be negatively correlated with the size of
discretionary stimulus. As Figure 3-12 shows, those countries that
already had large automatic stabilizers in place appear to have
adopted less discretionary fiscal stimulus, but they were
obviously still providing substantial fiscal relief during the
crisis.7



Stimulus is expected to fade slowly in 2010. Overall,the IMF
estimates that advanced G-20 countries will spend 1.6 percent of GDP on
discretionary stimulus in 2010, compared with 1.9 percent in 2009.8
Emerging and developing G-20 countries will also spend 1.6 percent of
GDP in 2010, compared with 2.2 percent in 2009. The IMF projects that
among the G-20 countries that adopted large stimulus programs, only
Germany, Korea, and Saudi Arabia will increase those programs in 2010.
In addition, substantial stimulus will continue into 2010 in Australia, Canada, China, and the United

______________________
/7/ The level of taxation in the economy is used as a proxy for automatic
stabilizers. Countries with large levels of taxation see immediate
automatic stabilizers because any lost income immediately reduces taxes.
Those same countries often tend to have more generous social safety nets
(funded by their higher taxes).

/8/ The averages are calculated by the IMF using PPP GDP weights. That
is, the IMF uses the size of an economyï¿½evaluated at purchasing power
parity exchange rates, which take into account different prices for
different types of goods and servicesï¿½to weight the different countries
in the averages.

States./9/  Thus, substantial fiscal stimulus should continue to
support the recovering world economy. The crucial question will be
whether sufficient private demand has been rekindled by late 2010 to
pick up the economic slack as stimulus unwinds.

Trade Policy in the Crisis

An extremely welcome development is the policy that was not
called on during the crisis: trade protectionism. Frequently viewed as
an accelerant of the Great Depression, protectionism has been largely
absent during the current crisis. In the Great Depression, trade
protectionism came into play after the crisis had started and was not
a cause of the Depression itself (Eichengreen and Irwin 2009). But the
extensive barriers that built up in the first few years of the
Depression meant that as production rebounded, trade levels could not
do so. In the current crisis, rather than respond to declining exports
with increasing tariffs, countries left markets open, allowing for the
possibility of a rebound in world trade. No major country has
instituted dramatic trade restrictions. Furthermore, while antidumping
and countervailing duty investigations have increased, the value of
imports facing possible new import restrictions by G-20 countries
stemming from new trade remedy investigations begun between 2008:Q1 and
2009:Q1 represents less than 0.5 percent of those countries' imports
(Bown forthcoming).

The Role of International Institutions

Rather than resort to beggar-thy-neighbor policies, this crisis
has been characterized by international policy coordination. National
policies did not take place in a vacuum; to the contrary, nations used
a number of international institutions to coordinate and communicate
their rescue efforts.

The G-20

The G-20, which includes 19 nations plus the European Union, was
the locus of much of the coordination on trade policy, financial policy,
and crisis response. Its membership is composed of most of the world's
largest economies-both advanced and emerging-and makes up nearly 90
percent of world gross national product.
The first G-20 leaders' summit was held at the peak of the
crisis in November 2008. At that point, G-20 countries committed to keep
their markets open, adopt policies to support the global economy, and
stabilize the financial sector. Leaders also began discussing
financial reforms that would help prevent a repeat of the crisis.

____________________________
/9/ Japan has announced additional stimulus since these estimates and
will also be providing extensive stimulus in 2010.

The second G-20 leaders' summit took place in April 2009 at the
height of concern about rapid falls in GDP and trade. Leaders of the
world's largest economies pledged to ``do everything necessary to ensure
recovery, to repair our financial systems and to maintain the global
flow of capital.'' Furthermore, they committed to work together on tax
and financial policies. Perhaps the most notable act of world
coordination was the decision to provide substantial new funding to
the IMF. U.S. leadership helped secure a commitment by the G-20
leaders to provide over $800 billion to fund multilateral banks
broadly, with over $500 billion of those funds allocated to the IMF in
particular.
In September 2009, the G-20 leaders met in Pittsburgh. They
noted that international cooperation and national action had been
critical in arresting the crisis and putting the world's economies on
the path toward recovery. They also recognized that continued action was
necessary, pledged to ``sustain our strong policy response until a
durable recovery is secured,'' and committed to avoid premature
withdrawal of stimulus. The leaders also focused on the policies,
regulations, and reforms that would be needed to ensurea strong recovery
while avoiding the practices and vulnerabilities that gave rise to
boom-bust cycles and the current crisis. They launched a new Framework
for Strong, Sustainable, and Balanced Growth that committed the G-20
countries to work together to assess how their policies fit together
and evaluate whether they were ``collectively consistent with more
sustainable and balanced growth.'' Further, the leaders committed to act
together to improve the global financial system through financial
regulatory reforms and actions to increase capital in the system.
Given the central role the G-20 had played in the response to
the crisis, it is not surprising that the leaders agreed in Pittsburgh
to make the G-20 the premier forum for their economic coordination. This
shift reflects the growing importance of key emerging economies such
as India and Chinaï¿½a shift that was reinforced by the agreement in
Pittsburgh to realign quota shares and voting weights in the IMF and
World Bank to better reflect shifts in the global economy.

The International Monetary Fund

The IMF's role has changed considerably over time, from being
the shepherd of the world's Bretton Woods fixed exchange rate system to
becoming a crisis manager. In a systemic bank run, a central bank
sometimes steps in as the lender of last resort. The IMF is not a
central bank and can neither print money nor regulate countries'
behavior in advance of a crisis, but it has played a coordinating and
funding role in many crises. As the scale of the current crisis became
apparent, it was clear that the IMF's funds were insufficient to
backstop a large systemic crisis, particularly in advanced nations.
While it is still unlikely to be able to arrest a run on major
advanced country financial systems, the increase in resources
stemming from the G-20 summit has roughly tripled the resources
available to the IMF and left it better suited to quell runs in
individual countries.
As the IMF's resources were expanded, the institution took a
number of concrete interventions. It set up emergency lines of credit
(called Flexible Credit Lines) with Colombia, Mexico, and Poland, which
in total are worth over $80 billion. These lines were intended to
provide immediate liquidity in the event of a run by investors, but
also to signal to the markets that funds were available, making a run
less likely. Now, rather than have to go to the IMF for funds during a
crisis, these countries are ``pre-approved'' for loans. In each of these
countries, markets responded positively to the announcement of the
credit lines, with the cost of insuring the countries' bonds narrowing
(International Monetary Fund 2009b). The IMF also negotiated a set of
standby agreements with 15 countries, committing a total of $75
billion to help them survive the economic crisis by smoothing current
account adjustments and mitigating liquidity pressures. IMF analysis
suggests that this program discouraged large exchange-rate swings in
these countries (International Monetary Fund 2009b). These actions as
well as the very existence of a better-funded global lender may have
helped to keep the contraction short and to prevent sustained currency
crises in many emerging nations.

The Beginning of Recovery Around the Globe

In contrast to the Great Depression, where poor policy actions-
monetary, fiscal, regulatory, and protectionist-helped turn a sharp
global downturn into the worst worldwide collapse the modern economy
has known, the recent massive policy response helped stop the
spiraling of this Great Recession. Already financial markets have
stabilized, GDP has begun to grow, and trade has begun to rebound. The
crisis is far from over, however; most notably, employment in many
countries is still distressingly weak. But the world economy appears
to have avoided the outright collapse that was feared at one point and
is now moving toward recovery.
The second quarter of 2009 saw the first hints of recovery in
many countries. World average growth was 2.4 percent, and even OECD
countries registered a positive 0.2 percent growth rate.10 The
rebound caught many by surprise. The IMF and the OECD had revised
projections steadily

_______________________
/10/ World weighted average quarterly real GDP growth rates at a
seasonally adjusted annual rate are from CEA calculations. The OECD
growth rate is from the OECD quarterly national accounts database.

downward through the winter and spring, but by the middle of 2009 many
economies had returned to growth. The one-quarter improvement in
annualized growth of 5.7 percentage points (from -6.4 percent to -0.7
percent from the first to the second quarter of 2009) in the United
States was one of the largest improvements in decades, but other
countries that had deeper contractions rebounded even more. Annualized
growth rates improved more than 14 percentage points in Germany and
Japan, while growth rates rose more than 30 percentage points in
Malaysia, Singapore, Taiwan, and Turkey. Other emerging markets, such
as China, India, and Indonesia, which did not contract but faced lower
growth during the crisis, rebounded to growth rates on par with their
performance during the 2000s (if not the rapid booms of 2006-07).
Trade had collapsed quickly, and it has begun to rebound quickly
as well. Beginning in March, when GDP was still falling rapidly, exports
began to turn. From lows in February 2009, nominal world goods exports
in dollar terms had grown 20 percent by October. U.S. nominal goods
exports picked up later but had grown 17 percent from their April lows
by October. As GDP began to rise, trade volume began to grow faster.
Annualized growth for world real exports was 2.4 percent in the second
quarter of 2009 and 16.8 percent in the third quarter. By comparison,
world weighted average annualized real GDP growth in the second and
third quarters of 2009 was 2.4 percent and 3.4 percent, respectively.
Financial markets are rebounding as well. Net cross-border
financial flows are near their precrisis levels, and gross flows are
increasing (although as of October 2009 they were still less than 80
percent of their average level in 2008). Libor-OIS spreads have fallen
to more typical levels, and equivalent measures in other markets have
subsided as well. Stock market indexes in the United States, Japan, the
United Kingdom, and the European Union have all risen substantially.
By October 2009, all were above their levels in October 2008, making up
dramatic losses in early 2009. House prices have stabilized in most
markets. Furthermore, the cost of insuring emerging-market bonds, which
had spiked in the fall of 2008, is now back roughly to its pre-crisis
level. The value of the dollar, which rose dramatically during the
crisis, has retreated toward its value before the crisis
(see Figure 3-2). From the end of March 2009 through December, the
dollar depreciated 10 percent against a basket of currencies. The
trade-weighted value is roughly at the same level as in the fall of
2007 and above its lows in 2008.
Potential financial problems still exist. Banks around the
world may not have recognized all the losses on their balance sheets.
The shock waves from the threatened default by Dubai World in November
2009 showed that there are still concerns in the market about potential
bad debts on various entities' balance sheets. There also are concerns
in some countries that asset prices may be rising ahead of
fundamentals.  But the crush of near-bankruptcy across the system has
clearly eased.

The Impact of Fiscal Policy

The broad financial rescues and the monetary policy responses
played crucial roles in stabilizing financial markets. Fiscal policy
also played an essential role in the macroeconomic turnaround. A simple
examination of G-20 advanced economies shows that while they all had
broadly similar GDP contractions during the crisis, the high-stimulus
countries-despite having much smaller automatic stabilizers-grew
faster after the crisis than countries that adopted smaller stimulus
packages. Table 3-2 shows the 2009 discretionary fiscal stimulus as a
share of GDP, the tax share of GDP (which is a rough estimate of
automatic stabilizers), as well as the GDP growth during the two
quarters of crisis (2008:Q4 and 2009:Q1) and the second quarter of
2009 when growth resumed in many countries. Growth reappeared first in
the high-stimulus G-20 countries.


[GRAPHIC(S) NOT AVAIABLE IN TIFF FORMAT]

Countries may have different typical growth patterns, however.
Thus, to understand the impact of fiscal stimulus, one must estimate
what would have happened had there been no stimulus-a counterfactual.
Private sector expectations in November 2008-after the crisis had begun
but before most stimulus packages were adopted-can serve as that
counterfactual. Thus, one can compare actual growth minus predicted
growth with the degree of stimulus to see whether those countries with
large stimulus packages outperformed expectations once the stimulus
policies were in place. The second quarter of 2009 is used as the test
case. Figure 3-13 shows actual growth minus expected growth compared
with 2009 discretionary fiscal




stimulus for the OECD countries for which private sector forecasts
were available on a consistent date.11 Countries with larger stimulus
on average exceeded expectations to a greater degree than those with
smaller stimulus packages. The two countries in this exercise with the
largest stimulus packages, Korea and Japan, outperformed expectations
by dramatic amounts. Countries such as Italy that had virtually no
stimulus performed worse than most. Among non-OECD countries, China
had one of the largest fiscal stimulus packages, and in the second
quarter of 2009 its growth was both rapid and far in excess of what
had been expected in November 2008. Fiscal
_______________________
/11/ Stimulus is measured as in Table 3-1, using IMF and OECD estimates
of 2009 fiscal stimulus. Forecasts are from J.P.Morgan. See Council of
Economic Advisers (2009) for more details. That report examines more
countries and a set of time series forecasts in addition to the
private sector (J.P.Morgan) forecasts. The results are quite similar
with a simple time series forecast. Results are slightly weaker with a
broader sample, but that is not surprising because the swings in the
economies in emerging markets were quite severe and difficult to
predict, and the stimulus policies may operate somewhat differently
in those nations. Council of Economic Advisers (2009) used Brookings
estimates as well as OECD and IMF, but those ceased being updated in
March, and thus this analysis uses only IMF and OECD estimates. Using
the June estimates alone slightly weakens the results because stimulus
announced late in the second quarter likely had little impact on
growth in that quarter.


stimulus seems to have been important in restarting world economic
growth in the second quarter of 2009.
After the second quarter of 2009, the relationship between
stimulus and growth weakens somewhat. High-stimulus countries still
exceed expectations relative to low-stimulus countries, but the
relationship is not statistically significant. It may be that quarterly
growth projections made nearly a year in advance are not precise enough
a measure of a third-quarter growth counterfactual.

The World Economy in the Near Term

While the return to GDP and export growth is encouraging,
exports are still far below their level in the summer of 2008, and GDP
is now far below its prior trend level. The IMF c urrently forecasts
annual world growth of 3.1 percent in 2010; the OECD projects 3.4
percent.12  For advanced countries, the forecasts are even more
restrained: the IMF projects 1.3 percent, the OECD 1.9 percent for
OECD countries. The IMF forecasts world trade to grow 2.5 percent in
2010; the OECD, 6.0 percent. These forecasts may be conservative. The
IMF forecast would leave trade at a much lower share of GDP than before
the crisis, and even if trade growth met the OECD's more aggressive
forecast, trade would not reach its previous level as a share of GDP
for some time. Given that trade declined faster than GDP in the crisis,
it is possible it will continue to bounce back faster as well,
surpassing these estimates.
How Fast Will Countries Grow? There is an open question about
how fast countries will grow following the crisis. After typical
recessions, the magnitude of a recovery often matches the depth of the
drop. In this way, GDP returns not only to its previous growth rate,
but to its previous trend path as well. If, however, the world's
advanced economies emerge from the crisis only slowly and simply
return to stable growth rates, output will be on a permanently lower
path. A financial crisis could lower the future level of output by
generating lower levels of labor, capital, or the productivity of
those factors. If the economy returns to full employment, and
productivity growth remains on trend, though, capital should
eventually return to its pre-crisis path because the incentives to
invest will be high. Thus, as long as the economy eventually returns
to full employment, the long-run impact of the crisis chiefly rests on
productivity growth in the years ahead. Chapter 10 discusses the
prospects and importance of productivity in more detail.
Some research suggests financial crises may result in a slow
growth pattern (International Monetary Fund 2009a), with substantial
average
____________________
/12/ IMF estimates are from International Monetary Fund (2009a).
OECD estimates are from Organisation for Economic Co-operation and
Development (2009b).


losses in the level of output in they ears following a financial crisis.
The same research, however, shows a wide variety of experiences
following crises, with a substantial number of countries returning to or
exceeding the pre-crisis trend level path of GDP. It is far too early
to project the likely outcome of this recession and recovery, but
there is hope that the aggressive policy responses and the potential
for a sharp uptick in world trade-bouncing back with responsiveness
similar in magnitude to its downturn-will return the path of GDP to
previous trend levels in many economies.
Concerns about Unemployment. One reason for the great concern
about the pace of growth after the recession is the current employment
situation. What was a financial crisis and then a real economy and
trade crisis has rapidly become a jobs crisis in many advanced
economies. The OECD projects the average unemployment rate in OECD
countries will have risen 2.3 percentage points from 2008 to 2009, with
an average jobless rate of 8.2 percent in 2009. More worryingly, the
OECD projects the group average will continue rising in 2010, and in
some areas (such as the euro area) the jobless rate is expected to be
even higher in 2011.
The United States has been an outlier in the extent to which
the GDP contraction has turned into an employment contraction. Figure
3-14 shows the change in GDP and in the unemployment rate from the first
quarter of 2008 to the second quarter of 2009. Typically, one would
expect a line running from the upper left to the lower right because
countries with small declines in GDP (or even increases) would have
small increases in unemployment (lower right) and those with larger
declines in GDP would have larger increases in unemployment (upper
left). Countries broadly fit this pattern during the current crisis
and recovery, but there are a number of aberrations. Germany saw a
large contraction in GDP, and while growth has resumed, its one-year
contraction was still sizable. Still, Germany's unemployment rate
barely increased. In contrast, the United States suffered a relatively
mild output contraction (for an OECD country), and yet it has had the
largest jump in the unemployment rate outside of Iceland, Ireland,
Spain, and Turkey, all of which had larger GDP declines.
There are several partial explanations for the large variation
in the GDP-unemployment relationship across countries. The more flexible
labor markets in the United States make the usual response of
unemployment to output movements larger than in most other OECD
countries; and, as discussed in Chapter 2, the rise in U.S. unemployment
in the current episode has been unusually large given the output
decline. Another factor is a policy response in some countries aimed at
keeping current employees in current jobs. The extreme example of such
a policy has been Germany's Kurzarbeit (short-time work) program, which
subsidizes companies that put workers



on shorter shifts rather than firing them. The OECD estimates the
German unemployment rate would be roughly 1 percentage point higher
without the program. Because such programs benefit only those who
already have jobs, they could hold down unemployment at the cost of a
more rigid labor market. Labor market flexibility is generally seen as
allowing lower unemployment on average over the course of the
business cycle and as permitting a more efficient distribution of labor
resources, thus enhancing productivity.

Global Imbalances in the Crisis

In addition to the unambiguous signs of problems in the U.S.
economy going into the crisis, there were clear signals that the global
economy was not well balanced. Global growth was strong from 2002 to
2007, but the growth was not well distributed around the world economy,
with fast growth in some emerging markets and sluggish growth in some
advanced economies. Further, that growth came with mounting imbalances
in saving and borrowing across the world. U.S. saving was very low,
which led to substantial borrowing from the rest of the world. Home
price bubbles and over borrowing were not exclusive to the United
States; the United Kingdom, Spain, and many other economies also
borrowed extensively, helping inflate asset prices in those
economies. This borrowing was paired with very high saving in some
countries, particularly in emerging Asia.
The extent to which the global imbalances were a cause of the
crisis or represented a symptom of poor policy choices in different
countries is a question of active debate (see Obstfeld and Rogoff 2009
for  discussion). The current account (net borrowing from or lending to
the rest of the world) can be defined as a country's saving minus its
investment. Thus, some argue that forces in the rest of the world cannot
be deterministic of a country's current account balance. A country saves
or borrows based on its own choices. In this formulation, the imbalances
were merely a symptom. In fact, some argued the imbalances were
beneficial because savings were channeled away from inefficient
financial markets in poor countries toward what were thought to be more
efficient markets in rich countries. Conversely, some argue that the
influx of global savings into the United States distorted incentives by
keeping interest rates too low and led to overborrowing and asset
bubbles. In this view, the imbalances played a leading role in the
crisis.
The truth almost certainly lies somewhere in between. The
influx of global savings into the United States did lower borrowing
rates and encouraged more spending and less saving within the U.S.
economy. This may have allowed the credit expansion and related asset
price bubbles to continue longer than they could have otherwise. At the
same time, even if the global savings in some sense led to U.S.
borrowing, the failure of the financial system to use that borrowing
productively and the failure of regulation to make sure risk was being
treated appropriately were surely partly to blame for the crisis.
As the U.S. economy seeks to find a more sure footing and a
growth path less dependent on borrowing and bubbles, world demand needs
to be redistributed so that it is less dependent on the U.S. consumer
and does not cause global imbalances to reappear and contribute to
distortions in the economy. Fixing the imbalances can help provide
more demand for the U.S. economy. But these imbalances also need to be
treated as symptoms of deeper regulatory and policy failures. Fixing the
imbalances alone will not prevent another crisis.
Since the onset of the crisis, the imbalances have partially
unwound (the likely future path of the U.S. current account is discussed
in more detail in Chapter 4). The U.S. current account deficit, which
had built to over 6 percent of GDP in 2006, was on a downward path
before the crisis struck in full force, falling to under 5 percent of
GDP at the start of 2008. After the crisis hit, it fell below 3 percent
of GDP in the first quarter of 2009. Major surplus countries-China,
Germany, and Japan-have all seen a reduction in their current account
surpluses from the highs of 2007. In all three cases, the surpluses
have stabilized at substantial levels (in the range of 3-5 percent
of GDP), but they are notably down from their highs. One essential
part of the response to the crisis has been the substantial fiscal
stimulus implemented by these three countries, which has helped
demand in these countries stay stronger than it otherwise
would have been.
Figure 3-15, which shows current account imbalances scaled to
world GDP, demonstrates how much of total world excess saving or
borrowing is attributable to individual countries. As the figure makes
clear, by 2005 and 2006, the United States was borrowing nearly 2
percent of world GDP, and by the end of 2008, China was lending nearly
1 percent of world GDP. During the crisis, the surpluses of OPEC
(Organization of Petroleum Exporting Countries) countries, Japan, and
Germany contracted, and the United States is now borrowing less than 1
percent of world GDP. China's surplus is also smaller than before the
crisis, but China is still lending nearly 0.5 percent of world GDP,
and OPEC surpluses may rise as well. But by the third quarter of 2009,
the degree of imbalance was substantially lower than just a year
earlier. There is hope that the short-run moves in these current account
balances are not simply cyclical factors that will return quickly to



former levels but rather that they represent a more sustained
rebalancing of world demand.
Net export growth is often a key source of growth propelling
a country out of a financial crisis. But in a global crisis, not every
country can increase exports and decrease imports simultaneously.
Someone must buy the products that are being sold, and the world's
current accounts must balance out. Thus far, the crisis has come with a
reduction in imbalances, with strong growth and smaller surpluses in
many surplus countries. Whether these shifts become a permanent part of
the world economy or policies and growth models revert to the pattern of
the 2000s will be an important area for policy coordination.

Conclusion

The period from September 2008 to the end of 2009 will be
remembered as a historic period in the world economy. The drops in GDP
and trade may stand for many decades as the largest worldwide economic
crisis since the Great Depression. In contrast to the Depression,
however, the history of the period may also show how aggressive policy
action and international coordination can help turn the world economy
from the edge of disaster. The recovery is unsteady and, especially
with regard to unemployment, incomplete, but compared with a year ago,
the positive shift in trends in the world economy has been dramatic.