Under Pressure


Jeff Hayden altBy Jeff Hayden

Between 2004 and 2013, Latin America recorded impressive growth and strong progress on a range of social issues. High commodity prices combined with strengthened economic management and progressive social policies to propel the region forward.

This strength was all the more striking against the backdrop of the 2008–09 global financial crisis, which mired many advanced economies in recession but saw emerging markets, including many in Latin America, power ahead. This led some observers to dub the period the “Latin American decade.”

Now, as the world’s economic leaders prepare to gather in Lima, Peru, in October for the Annual Meetings of the International Monetary Fund and the World Bank, the picture looks quite different.

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Banking Union Before Euro Adoption: Flak Jacket or Straitjacket?


By John Bluedorn, Anna Ilyina and Plamen Iossifov

All European Union members, except Denmark and the United Kingdom, are expected under EU treaties to eventually adopt the euro. Six Central and Eastern EU members – Bulgaria, Croatia, Czech Republic, Hungary, Poland and Romania – are yet to do so.

In the meantime, these countries have a decision to make: Should they opt in to the Banking Union before adopting the euro? Such a move may offer greater insurance against shocks, but at a certain cost to policy flexibility.  In a recent study, we explore some of the trade-offs that countries need to weigh.

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Making Monetary Policy Decisions in the Dark


By Francesco Grigoli, Alexander Herman, Andrew Swiston, and Gabriel Di Bella

(Version in Español and Português)

In the wake of the global financial crisis, monetary and fiscal policies were used aggressively to counteract the effects of the crisis on economic activity. Policymakers look at a number of indicators to guide them in assessing an economy’s level of activity relative to its productive capacity. But trying to figure out the position of the economy in real time is often quite challenging, with consequences for setting policy.

In the case of Brazil in 2011, for example, policymakers estimated in real time that the economy was at a level of output consistent with its productive capacity. Over time, however, the assessment of the cyclical position of the Brazilian economy changed drastically. It had not just been at full capacity, but was overheating. The economy was actually facing inflationary pressures, requiring policy tightening to bring it back to the central bank’s target.

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From Windfall to Windmill: Harnessing Asia’s Dynamism for Latin America


By Andre Meier and Fabiano Rodrigues Bastos

(Versions in Español and Português)

Latin America’s recent economic fortunes highlight the region’s closer economic ties with Asia. China, in particular, has grown into a crucial source of demand for Latin American commodities over the past two decades, providing significant gains to the region. The flip side is that the ongoing structural slowdown of Chinese investment is weighing considerably on the prices of those commodities, and the countries that export them.

But Asia can be much more than just a source of episodic windfall gains (and losses) for Latin America. Like a windmill, Asia could help to power a stronger Latin American economy—by providing an example of successful regional trade integration and through greater direct links across the Pacific that benefit both sides. However, securing these benefits will require clear and realistic objectives, a long-term strategy, and attention to the political and social implications of greater economic integration. 

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Greece: Past Critiques and the Path Forward


IMG_0248By Olivier Blanchard

(Versions in DeutschEspañolFrançaisItalianoελληνικάРусский中文, 日本語عربي, and Português)

All eyes are on Greece, as the parties involved continue to strive for a lasting deal, spurring vigorous debate and some sharp criticisms, including of the IMF.

In this context, I thought some reflections on the main critiques could help clarify some key points of contention as well as shine a light on a possible way forward.

The main critiques, as I see them, fall under the following four categories:

  • The 2010 program only served to raise debt and demanded excessive fiscal adjustment.
  • The financing to Greece was used to repay foreign banks.
  • Growth-killing structural reforms, together with fiscal austerity, have led to an economic depression.
  • Creditors have learned nothing and keep repeating the same mistakes.

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Behind the News in Greece and China, Moderate Growth Continues


 By Olivier Blanchard

(Versions in Español and عربي)

Today we published the World Economic Outlook Update.

But first, let me talk about the elephant in the room, namely Greece.

The word elephant may not be right: As dramatic as the events in Greece are, Greece accounts for less than two percent of the Eurozone GDP, and less than one half of one percent of world GDP.
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U.S. Monetary Policy: Avoiding Dark Corners


By Ali Alichi, Douglas Laxton, Jarkko Turunen, and Hou Wang

Copyright : © fStop Images GmbH / AlamyA few weeks ago, the Fund suggested that the Federal Reserve could defer its first increase in the policy rate until it sees greater signs of wage or price inflation, with a gradual increase in the federal funds rate thereafter. Such a monetary policy strategy could help avoid the “dark corners” in which, as Olivier Blanchard has argued, small shocks can have potentially large effects. In this blog and accompanying working paper, we expand upon this idea. We also outline the potential benefits of an expanded communications toolkit.

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