What should we conclude about the implications of the global crisis for the future of the world economy? This column, the second of a two-part series, outlines the exit strategies required for fiscal and monetary policy. It says that the crisis ought to be seen as a temporary period of turmoil, rather than a paradigm-shifting event.

This column introduces timelines, produced by the New York Fed, that organise and illustrate policymakers’ responses to the global financial crisis.

What’s driving the unprecedented collapse in global trade flows? This column shows that the magnitude of the global decline reflects greater synchronisation of trade flow declines across countries. Globalisation has brought the world in sync.

For most nations in the world, this is a trade crisis. Leaving China and India aside, income of developing nations is expected to drop 1.6% this year, even though these nations had nothing to do with subprime assets or the financial shenanigans that triggered the crisis. A new CEPR-World Bank e-book reports that protectionism is not yet a problem, but argues that the “fateful allure of protectionism” is a threat. To counter the threat, four concrete steps should be taken to reinforce the global trade and financial architecture.

The collapse in trade has been unprecedentedly severe. This column examines potential explanations. While the global fragmentation of production has increased the responsiveness of trade flows to drops in demand, trade also responds more sharply to GDP during global slowdowns than during tranquil times.

Though Japan has not suffered greatly from a housing collapse or toxic assets, its economy has been hit harder by the crisis than the US or EU. Japan’s contraction is almost entirely due to a steep fall in external demand. This column uses input-output analysis to show that the fall in US demand has had an amplified effect on Japan because it not only reduces Japanese net exports to the US but also net exports of intermediate goods to Asian countries, where they would have been assembled for final export to the US.

Trade finance, which supports the bulk of world trade, has deteriorated during the crisis and will continue to worsen in 2009. This column says that the response of public-backed institutions has been insufficient to cover the gap between supply and demand of trade finance worldwide. The G20 has adopted a wider package for injecting some $250 billion in order to further support trade finance.

Developing countries are expected to be severely hit by the recent financial crisis. This column says that based on previous crises, aid flows to developing countries should be down by 13%. However, donor countries’ pledges may soften the shock this time around.

The financial crisis is not over but it seems less scary since the US stock market decided that most big banks will survive. This column provides a current scoreboard of the crisis game and reminds everybody that the underlying problems are hardly resolved. A lot of banks sorely need capital and need to raise it relatively cheaply.

Is the current collapse in trade unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions? This column, by carefully comparing real and nominal trade trends, finds that trade seems to be a victim of non-trade weaknesses in credit and demand. While we should maintain a rearguard action on the protectionism front, the cure for the symptoms lies in curing the underlying illness.