WASHINGTON - Warning that the current global recession is likely to be ‘unusually long and severe’ and the recovery sluggish, the International Monetary Fund (IMF) Thursday said restoring confidence in the financial sector is ‘critically important’.
‘Aggressive monetary and fiscal policy measures are needed to support aggregate demand in the short term,’ said IMF’s latest World Economic Outlook (WEO), calling for ‘coordinated monetary, fiscal, and financial policies’ to deal with the crisis.
‘Even with such measures, one of the most important lessons from episodes of financial crises is that restoring confidence in the financial sector is critically important for macroeconomic policies to be effective and for recovery to take hold,’ said the report published ahead of next week’s World Bank-Fund Spring meeting.
Fiscal stimulus is also associated with stronger recoveries, the report said. However ‘the impact of fiscal policy on the strength of the recovery is found to be smaller for economies that have higher levels of public debt.’
Noting that recessions associated with financial crises tend to be severe, the report said: ‘Recoveries from such recessions are typically slow. If such recessions are globally synchronised then they tend to last even longer and be followed by recoveries that are even weaker.’
Countercyclical policies can be helpful in ending recessions and strengthening recoveries. In particular, expansionary fiscal policies seem particularly effective, the Fund said. Monetary policy can help shorten such recessions, but is less effective than usual.
‘These findings suggest that the current recession is likely to be unusually long and severe, and the recovery sluggish,’ the WEO said.
However, strong countercyclical policy action, combined with action to restore confidence in the financial sector, could improve prospects for recovery, the report said.
Examining the patterns of recessions and recoveries in 21 advanced economies including India from 1960 to the present, the WEO said 15 of these recessions can be associated with financial crises, and three episodes of globally synchronised recessions in 1975, 1980 and 1992.
Globally synchronized recessions are longer and deeper than others, the WEO said noting ‘Recoveries are usually sluggish, owing to weak external demand, especially if the United States is also in recession.’
During the 1975 and 1980 recessions, sharp falls in US imports contributed to a significant contraction in world trade.
The analysis suggests that the combination of financial crisis and a globally synchronised downturn is likely to result in an unusually severe and long lasting recession, the IMF report said.
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