Special section: Global Reach? Perspectives on U.S. International Spillovers.

Introduction

With its near universal membership, the International Monetary Fund is in a unique position to examine global interrelationships. Indeed, cross-country linkages lie at the heart of the Fund's role in the world economy. In particular, the central objective of the Fund's surveillance of exchange rate and domestic policies is to avoid negative spillovers from the policies of one country to its international partners.

This special section of IMF Staff Papers "Global Reach? Perspectives on U.S. International Spillovers" includes three papers, each tackling different aspects of the links between the United States and the rest of the world. Reflecting both recent events and the new focus of the Fund, an important theme in all three papers is the role of financial markets in propagating spillovers. While U.S. trade links have been analyzed in great detail, there has been significantly less work in the past on the overall size and impact of financial spillovers.

As the recent turbulence has shown, however, financial links can have powerful effects on the global economy. This special section is particularly timely, providing insights into how these links work.

The first paper, "Foreign Entanglements: Estimating the Source and Size of Spillovers Across Industrial Countries" by Tamim Bayoumi and Andrew Swiston, examines the general issue of the sources of output spillovers across countries. Recent work on the international business cycle has tended to focus more on the size of the links across countries than on the sources of the underlying shocks. As a result, there remains considerable uncertainty as to whether the international cycle is driven largely by common shocks (all countries facing--say--a similar rise in costs of energy) or by spillovers from some countries to others. The paper aims to untangle the sources of shocks by including both changes in output in the major global currency areas--the United States, euro area, and Japan--and an aggregate of geographically and economically diverse smaller countries. The logic of adding the latter group is that a truly global shock would likely affect these countries at the same time as the large currency areas, and hence by including them in the analysis the impact of global shocks can be differentiated from those emanating from the major currency unions.

The results suggest that the United States has large effects on the rest of the world, but that the euro area and Japan do not, while the impact of global shocks is less well defined. In addition, the paper finds that the main source of U.S. spillovers to the rest of the world comes through financial markets rather than trade or commodity price effects. This helps to explain the disproportionate effect of U.S. growth on the rest of the world compared with the euro area and Japan, which have strong trade links but ...