World economic outlook: impact of the global financial crisis

Abstract

Why did stock markets around the world crash? What are the likely impacts? These questions will be debated for many years to come. Without pretending to be prescient, this study examines several possible outcomes for the world economy that will be of interest to economists and business planners. The unfolding of a financial crash depends on a few key elements. First, the automatic or endogenous reactions by consumers and business planners. Will consumers retrench fearing a recession and unemployment? Will businesses postpone investment spending plans? Second, what will be the reaction of policymakers in the United States and abroad? Already we have seen substantial reductions in U.S. interest rates followed by much smaller reductions in Germany and Japan. In the longer run, will the U.S. congress and the president come to terms on a long-run deficit reduction plan? Will European policymakers continue to follow tight budget plans? Finally, what is the future of the Louvre Accord, the arrangement under which U.S. dollar exchange rates were stabilized over the past year?