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Smoothening the exit

September 07, 2009

 Abstract: With the global crisis winding down in 2009, a debate has emerged on how to smoothly disengage from the large fiscal and monetary commitments (made by countries earlier to fight the crisis) without derailing the ongoing recovery. Three issues relating to the debate have been discussed. One is assessment of what is relatively more important to recovery: fiscal stimulus or financial stabilisation. A second dimension is the expected turn in the monetary cycle. If the recovery went faster than expected, the overhang of liquidity would induce inflationary pressures. However, a premature shift to an anti-inflationary stance would mean high interest rates, potentially destabilising the recovery. Finally, the consequences of a faulty exit strategy by the world’s larger economies would spill over to the smaller ones. Against this backdrop, sequencing and magnitude of measures, along with effective global coordination and monitoring, are key to minimising the risks that exit poses for the sustainability of the global recovery.

Keywords: recovery; exit strategy; policy response; fiscal stimulus; financial system; liquidity overhang; global integration; global financial crisis

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