IMF Introduces ‘Spillbacks’ Into Lexicon of Global Finance Officials
April 16, 2014 Leave a comment
Apr 12, 2014
IMF Introduces ‘Spillbacks’ Into Lexicon of Global Finance Officials
The world’s premier financial counselor is trying to coin a new word for finance ministers and central bankers: “spillbacks.”
Not “spillovers,” a term frequently used to describe the beneficial or damaging effects a country’s economic policies can have on other nations.
Not even “spill back,” a phrase for what happens with clogged pipes (or toilet mishaps).
The International Monetary Fund‘s new term became official Saturday as part of its efforts to encourage the U.S. Federal Reserve to proceed cautiously in pulling back its easy-money policies.
“Monetary policy settings in major countries should continue to be carefully calibrated and clearly communicated, with cooperation among policymakers to help manage spillovers and spillbacks,” the IMF’s steering committee said in its official communiqué.
“Spillbacks,” in IMF thinking, are economic feedback loops. (They’re not to be confused with the civil engineering term for a traffic bottleneck.)
So in the case of China, one spillback of its yuan policy might be depressed Chinese growth: If Beijng’s yuan policy is suppressing U.S. output, then demand for Chinese products from the world’s largest economy will also likely be lower.
In this case, however, the IMF is most likely trying to give the Fed an economically sound reason not to exit its easy-money policies too quickly.
The Fed has a domestic mandate. It’s supposed to be concerned about the U.S. economy.
That’s why criticisms of the Fed’s policies have, to a large extent, fallen on deaf ears. Emerging markets have complained the Fed isn’t sufficiently taking into account the damaging impact of its monetary policies on their economies.
The Fed’s exit from its easy-money policies is raising borrowing costs around the world, reshaping the global financial landscape after years of ultra-low rates. Higher rates, in conjunction with slowing growth in emerging markets and pockets of political turmoil, have fueled bouts of market volatility around the globe in the past year.
But emerging markets are now large enough that if their growth slows because of the Fed’s policies, it could impair U.S. economic expansion, too.
The fund attempted to prove its point in its latest World Economic Outlook published Tuesday.
It estimated the impact of a faster Fed exit than the central bank now plans. The result? Higher borrowing costs would subdue investment in emerging markets and slow their growth. And that would ultimately weigh on the U.S. expansion: The American economy would grow roughly 1.2 percentage points slower next year than under a more measured Fed exit, the fund said.
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