How to Manage the Commodity Roller Coaster

Vitor Gasparby Vitor Gaspar 

The world economy is experiencing important transitions and associated uncertainties.

  • Commodity prices have fallen sharply, with adverse consequences for exporting countries.
  • China’s rebalancing and the prospect of U.S. interest rate increases are having important and costly spillover effects on other economies.
  • And these and other factors are posing important fiscal challenges, especially for emerging markets.

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Uncertain Times, Difficult Choices

By Vitor Gaspar and Alejandro Werner              

(Versions in Español and Português)                                         

Latin America under stress

After a period of strong growth, economic activity in Latin America has slowed sharply. Growth among the six larger, financially-integrated economies—Brazil, Chile, Colombia, Mexico, Peru, and Uruguay—is expected to be negative this year. With heightened financial market pressures and limited policy space, the credibility of policy makers is being seriously tested. In this challenging environment, policy-makers in these six countries face some difficult questions: how to strike the right balance between smoothing the adjustment and strengthening credibility? What role should fiscal policy play in this new, uncertain and rapidly evolving environment?

These and other questions will be addressed at the Annual Meetings in Lima, Peru next week.  As we prepare for these meetings, we offer our thoughts on some of the pressing issues for Latin America.

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Metals and Oil: A Tale of Two Commodities

By Rabah Arezki and Akito Matsumoto

(Version in Español)

“It was the best of times, it was the worst of times.” With these words Charles Dickens opens his novel “A Tale of Two Cities”. Winners and losers in a “tale of two commodities” may one day look back with similar reflections, as prices of metals and oil have seen some seismic shifts in recent weeks, months and years.

This blog seeks to explain how demand — but also supply and financial market conditions — are affecting metals prices. We will show some contrast with oil, where supply is the major factor. Stay tuned for a deeper analysis of the trends in a special commodities feature, which will be included in next month’s World Economic Outlook.

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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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Financial Stability Committees: Learning from the Experts

By Jorge Roldos and Alejandro Werner

(Versions in Español and Português)

Macroeconomists and financial sector experts need to talk to each other. Such communication is important to help identify and measure systemic risks as well as to coordinate and/or conduct macroprudential policies—rules that reduce instability across the financial system.

The creation of financial stability committees, including in Latin America, have been a forum for precisely this—working together to share information about evolving risks, develop monitoring and mitigating tools, and to define the decision-making authority, accountability, and communication to the general public. But institutional design and governance of these councils differ across countries.

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Global Energy Subsidies Are Big—About US$5 Trillion Big

By Sanjeev Gupta and Michael Keen

(Versions in 中文, Français, 日本語Русский and Español)

In their blog, Ben Clements and Vitor Gaspar make the points that global energy subsidies are still very substantial, that there is a strong need for reform in many countries, and that now is a great time to do it. This blog sets out what we mean by “energy subsidies,” provides details on their estimation, and explains how they continue to be high despite the recent drop in international energy prices (Chart 1).


Our latest update of global energy subsidies shows that “pre-tax” subsidies—which occur when people and businesses pay less than it costs to supply the energy—are smaller than a few years back. But “post-tax” subsidies—which add to pre-tax subsidies an amount that reflects the environmental, health and other damage that energy use causes and the benefit from favorable VAT or sales tax treatment—remain extremely high, and indeed are now well above our previous estimates.

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