Fiscal Arrangements in Federations: Four Lessons for Europe


Martine GuerguilBy Martine Guerguil 

Does the European Union need closer fiscal integration, and in particular a stronger fiscal center, to become more resilient to economic shocks? A new IMF book, Designing a European Fiscal Union: Lessons from the Experience of Fiscal Federations, published by Routledge, examines the experience of 13 federal states to help inform the debate on this issue. It analyzes in detail their practices in devolving responsibilities from the subnational to the central level, compares them to those of the European Union, and draws lessons for a possible future fiscal union in Europe.

The book sets out to answer three sets of questions: (1) What is the role of centralized fiscal policies in federations, and hence the size, features, and functions of the central budget? (2) What institutional arrangements are used to coordinate fiscal policy between the federal and subnational levels? (3) What are the links between federal and subnational debt, and how have subnational financing crises been handled, when they occurred?

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What’s not to love about free data


By iMFdirect

The IMF has released a new, free online data tool.

You can find all sorts of good stuff: from budget numbers to balance of payments data, debt statistics to critical global indicators.  Good data supports good policy choices. With reliable and timely economic data, people can identify turning points in the economy or see looming risks.

*Wonky Warning* The data platform provides greater dynamic data visualizations, which show development over time and interact with each other. It includes a richer library of statistical tools, such as forecasting, smoothing, and aggregation. The platform strengthens the narrative and analysis of any data and allows users to customize their data experience.

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Housing Bubbles: An Ounce of Prevention is Worth a Pound of Cure


By Kevin Fletcher and Peter Kunzel

The main features of boom-bust cycles in housing markets are by now all too familiar.

During booms, conditions such as lax lending standards and low interest rates help drive up house prices and with them mortgage debt.

When the bust arrives, over-indebted households find themselves underwater on their mortgages— owing more than their homes are worth.

Feeling the pinch of reduced wealth and access to credit, households, in turn, rein in consumption. At the same time, lower house prices cause investment in new houses to tumble.

Together, these forces significantly depress output and increase unemployment. Non-performing loans increase, and banks respond by tightening credit and lending standards, further depressing house prices and adding to the vicious cycle.

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It’s Unofficial!


DSC_7906By Sabina Bhatia 

I know it might sound odd, but I actually like the IMF-World Bank Annual Meetings. I know the traffic snarls on Pennsylvania Avenue are terrible, Washington cabbies ruder than ever, lots of men in dark suits (and sadly, they are still mostly men), and there is the constant rush from meeting to meeting.

But beyond the long lines, long hours, cold coffee and the constant buzz of communiqués, press releases, and scores of official meetings, I find my place in the  rich and stimulating discussions among the non-official community.

This year, over 600 civil society organizations, including members of parliament, academics, and several youth and labor groups, came to the meetings. They deliberated, discussed and debated some thorny issues. The burning issues close to their hearts? Not that different from what officials are also debating.  Here is some of what I heard:

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Fiscal Policy’s Evolving Role


Fiscal policy makers have faced an extraordinarily challenging environment over the last few years. At the outset of the global financial crisis, the IMF for the first time advocated a fiscal expansion across all countries able to afford it, a seeming departure from the long-held consensus among economists that monetary policy rather than fiscal policy was the appropriate response to fluctuations in economic activity. Since then, the IMF has emphasized that the speed of fiscal adjustment should be determined by the specific circumstances in each country. Its recommendation that in general deficit reduction proceed steadily, but gradually, positions the IMF between the fiscal doves (who argue for postponing fiscal adjustment altogether) and the fiscal hawks (who argue for a front-loaded adjustment).

All this is highlighted in a  recently released book Post-Crisis Fiscal Policy, edited by Carlo Cottarelli, Philip Gerson and Abdelhak Senhadji,  that brings together the analysis underpinning the IMF’s position on the evolving role of fiscal policy.  The book underscores how the global financial crisis has reshaped our understanding of the role of fiscal policy with topics that include a historical view of debt accumulation; the timing, size, and composition of fiscal stimulus packages in advanced and emerging economies; the heated debate surrounding the size of fiscal multipliers and the effectiveness of fiscal policy as a countercyclical tool and more.

Check out this book, which is written for a wide audience, and watch the webcast of the book launch hosted by the Peterson Institute for International Economics on July 14 .

Public Finances Are on the Mend, but No Clean Bill of Health


By Sanjeev Gupta and Martine Guerguil

(Version in Español FrançaisРусский中文, and 日本語)

We’ve had a spate of good news on the economic front recently. Does this mean that we are finally out of the fiscal woods? According to our most recent Fiscal Monitor report, not yet, as public debt remains high and the recovery uneven.

First, the good news. The average deficit in advanced economies has halved since the 2009 peak. The average debt ratio is stabilizing. Growth is strengthening in the United States and making a comeback in the euro area, and should benefit from the slower pace of consolidation this year. Emerging markets and developing countries have maintained their resilience, in part thanks to the policy buffers accumulated in the pre-crisis period. Talks of tapering in the United States have left a few of them shaken, but not (quite) stirred.

But there is still some way to go. The average debt ratio in advanced economies, although edging down, sits at historic peaks, and we project it will still remain above 100 percent of GDP by 2019 (Chart 1). The recovery is still vulnerable to several downside risks, including those stemming from the lack of clear policy plans in some major economies. The recent bouts of financial turmoil have raised concerns that the anticipated tightening of global liquidity could expose emerging markets and low-income countries to shifts in investor sentiment and more demanding debt dynamics.

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Global Financial Stability: Beginning To Turn The Corner


GFSRBy José Viñals

(Version in  EspañolFrançaisРусский中文 and 日本語)

 

Global financial stability is improving—we have begun to turn the corner.

But it is too early to declare victory as there is a need to move beyond liquidity dependence—the central theme of our report—to overcome the remaining challenges to global stability.

Progress

We have made substantial strides over the past few years, and this is now paying dividends.  As Olivier Blanchard discussed at yesterday’s press conference of the World Economic Outlook, the U.S. economy is gaining strength, setting the stage for the normalization of monetary policy.

In Europe, better policies have led to substantial improvements in market confidence in both sovereigns and banks.

In Japan, Abenomics has made a good start as deflationary pressures are abating and confidence for the future is rising. And emerging market economies, having gone through several recent bouts of turmoil, are adjusting policies in the right direction.

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