Posted on July 29, 2014 by iMFdirect
By Hamid Faruqee
Global interest rates will eventually move higher. We do not know precisely when, how fast, or how far, but we do know the direction. After a long period of very low interest rates following the global financial crisis, some central banks (mainly, the U.S. Federal Reserve and the Bank of England) are planning to “normalize”—that is, to gradually tighten their easy monetary policies as their economies improve. And when U.S. and U.K benchmark interest rates go up, interest rates tend to go up elsewhere, too.
So should we worry if and when global financial conditions tighten?
The 2014 IMF Spillover Report prepared by IMF staff looks into this important issue—what to watch out for and who to watch out for as interest rates begin to normalize. The answer depends on two sets of factors. First, what is going on in the originating source countries in terms of the underlying drivers behind higher yields—for example, whether or not stronger growth, say in the U.S. and U.K., is the main force behind higher interest rates. Second, what is going on in the receiving countries—that is, how vulnerable they might be to higher borrowing costs. Both these factors matter for spillovers as highlighted in the report.
Filed under: Advanced Economies, Economic outlook, Economic research, Emerging Markets, Europe, Financial Crisis, Financial regulation, growth, IMF, International Monetary Fund, Politics | Tagged: Bank of England, inflation, interest rates, spillover effects, spillover reports, Tapering, U.S. Fed, United States Federal Reserve | Leave a comment »
Posted on July 19, 2012 by iMFdirect
By Ajai Chopra
The U.K. economy has been flat for nearly two years. This stagnation has left output per capita a staggering 14 percent below its precrisis trend and 6 percent below its pre-crisis level.
Weak growth has kept unemployment high at 8.1 percent, with youth unemployment an alarming 22 percent.
The effects of a persistently weak economy and high long-term unemployment can reverberate through a country’s economy long into the future—commonly referred to by economists as hysteresis.
Our analysis of such hysteresis effects shows that the large and sustained output gap, the difference between what an economy could produce and what it is producing, raises the danger that a downturn reduces the economy’s productive capacity and permanently depresses potential GDP.
Filed under: Advanced Economies, Economic Crisis, Economic research, Employment, Europe, Fiscal policy, Fiscal Stimulus, growth, IMF, International Monetary Fund, Public debt | Tagged: bank funding, Bank of England, banks, borrowing costs, collateral, credit, crisis, deficits, demand, Economics, financial stability, GDP, government, gross domestic product, haricuts, hysteresis, idle capital, IMF, infrastructure, interest rates, International Monetary Fund, investment, liquidity, monetary policy, new technologies, output, output gap, policymakers, private sector, public debt, public sector, quantitative easing, risks, stagnation, U.K., unemployment, United Kingdom, yield curve | 6 Comments »