2014 Triennial Surveillance Review - External Study - Integrating Bilateral and Multilateral Surveillance on a Continuing Basis

Abstract

Overall the Fund has done a good job anticipating possible problems in each of the cases being examined here, which for shorthand we will label Fed tapering, Abenomics, China growth risks, and German fiscal policy. Moreover, the messaging has been broadly consistent across the Fund’s diverse range of products including multilateral surveillance products (e.g., the World Economic Outlook and the Global Financial Stability Report), bilateral products (including especially Article IV country reports), and the Fund's various new exercises aimed at proactively identifying risks, especially those of global systemic significance. The messaging is consistent in the sense that differences across products can mostly be explained by differences in timing, approach and emphasis, understanding that the problems involved are profoundly difficult with no one clear answer, much less a one-size-fits-all answer. Various modalities are listed and briefly summarized in the appendix to this report. The extent to which the Fund’s analysis has weaknesses is largely related to political and market sensitivities, particularly in dealing with large influential members. For example, we will raise concerns about whether the Fund was forceful enough in pointing out possible risks posed by the U.S. Federal Reserve’s third round of quantitative easing (QE III), initiated in September 2012, and whether it was forceful enough in advocating structural reforms (e.g., tax reform) that might have helped support long-term U.S. growth and helped soften spillover effects to other countries. In the case of Japan, the Fund was understandably quite supportive of Abenomics. But should it have worried about the financial stability risks if rising inflation expectations led to proportional (or greater) rises in long-term nominal interest rates in Japan? Given that the initial impulse of Abenomics was a large depreciation in the yen, should the Fund have placed even greater emphasis on “third arrow” structural reforms as an assurance that Abenomics would have a lasting long-term positive global impact, and not just short-term competitive effects? In the case of China, the Article IV reports were in fact quite alert to potential problems, and the 2013 report even incorporated results from a working paper on the global effects of a hard landing in China over the