Still Some Hurdles On The Fiscal Path


Martine GuerguilBy Martine Guerguil

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

Five years into the crisis, the fiscal landscape remains challenging. On the positive side, deficit-cutting efforts and the first signs of recovery reduced the fiscal stress felt in many advanced economies; but debt ratios often remain at historical peaks. At the same time, slowing growth and rising borrowing costs, combined with unabated demands for improved public services, puts pressure on government budgets in emerging market economies.

So we created  an index of ‘fiscal difficulty’ that shows the biggest challenge ahead for advanced economies is to maintain budget surpluses until debt ratios return to lower levels.  We expect this will take several years.

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Taming government debt—it can be done, but it ain’t easy


By Helge Berger and  Justin Tyson

Sooner or later, and one way or the other, government debt in advanced economies will have to come down from the record levels reached in the wake of the global economic and euro area crises. Figure 1.Dev in Gross Debt and Structural Balance in Adv Economies There is no magic number for how much sovereign debt an economy can shoulder. And, as bringing down debt by cutting government spending or raising taxes comes at the risk of reducing growth and employment in the short term, there are arguments to not proceed too hastily. But eventually debt will have to be put back on a downward path in many countries. This will help rebuild fiscal buffers and cope with the costs of aging. So, what should governments do?

Our new analysis takes a closer look at the historical record and key trade-offs.  The bottom line: it is possible to reduce debt when growth is low. Ultimately perseverance should pay off.

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Preventing The Next Catastrophe: Where Do We Stand?


David RomerGuest post by David Romer
University of California, Berkeley, and co-host of Rethinking Macro II: First Steps and Early Lessons

(Versions in 中文, 日本語, and Русский)

As I listened to the presentations and discussions, I found myself thinking about the conference from two perspectives. One is intellectual: Are we asking provocative questions? Are interesting ideas being proposed? Are we talking about important issues? By that standard, the conference was very successful: the discussion was extremely stimulating, and I learned a great deal.

The second perspective is practical: Where do we stand in terms of averting another financial and macroeconomic disaster? By that standard, unfortunately, I fear we are not doing nearly as well. As I will describe, my reading of the evidence is that the events of the past few years are not an aberration, but just the most extreme manifestation of a broader pattern. And the relatively modest changes of the type discussed at the conference, and that in some cases policymakers are putting into place, are helpful but unlikely to be enough to prevent future financial shocks from inflicting large economic harms.

Thus, I believe we should be asking whether there are deeper reforms that might have a large effect on the size of the shocks emanating from the financial sector, or on the ability of the economy to withstand those shocks. But there has been relatively little serious consideration of ideas for such reforms, not just at this conference but in the broader academic and policy communities.

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Rethinking Macroeconomic Policy


blanchBy Olivier Blanchard

(Versions in عربي中文FrançaisРусский, and Español)

The IMF has just hosted a second conference devoted to rethinking macroeconomic policy in the wake of the crisis. After two days of fascinating presentations and discussions, I am certain of one thing:  this is unlikely to be our last conference on the subject.

Rethinking and reforms are both taking place.  But we still do not know the final destination, be it for the redefinition of monetary policy, or the contours of financial regulation, or the role of macroprudential tools. We have a general sense of direction, but we are largely navigating by sight.

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How to Sustain Recent Financial Gains: Fix Old Risks and Meet New Challenges


GFSRBy José Viñals

(Versions in  عربي ,日本語Español)

Policymakers’ decisive actions  since our last report in October have increased global financial stability by reducing acute risks.

  • In the euro area, policymakers averted a financial cliff.
  • In the United States, the worst fears of the fiscal cliff had been averted, while balance sheet repair and continued monetary easing have supported financial markets and the recovery.
  • In Japan, new policy initiatives have caught the imagination of global markets that Japan may finally leave its deflation valley.

But our latest Global Financial Stability Report concludes that improved financial markets and gains in financial stability will not be sustained—and new risks are likely to emerge—unless policymakers address key underlying vulnerabilities.

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Moving Beyond Crisis Management in the West Bank and Gaza


By Oussama Kanaan, Udo Kock, and Mariusz Sumlinski

(Versions in  عربي)

It was an early spring morning in East Jerusalem in 2011, and we were wrapping up our two-week mission with a presentation to donor representatives on the Palestinian economy’s health. Our audience appeared encouraged by our assessment of performance over the previous three years (2008–10): the economy had been recovering strongly, supported by generous aid and an easing of Israeli restrictions on movement and trade.

And the Palestinian Authority had made impressive progress in institution-building, which alongside prudent fiscal management, had enhanced public-sector efficiency, reduced wasteful expenditure, and enabled a reduction in its recurrent budget deficit from US$1.7 billion in 2008 to US$1.1 billion in 2010.

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We May Have Avoided the Cliffs, But We Still Face High Mountains


WEO

by Olivier Blanchard

Version in Español  and عربي

Optimism is in the air, particularly in financial markets. And some cautious optimism may indeed be justified.

Compared to where we were at the same time last year, acute risks have decreased. The United States has avoided the fiscal cliff, and the euro explosion in Europe did not occur. And uncertainty is lower.

But we should be under no illusion. There remain considerable challenges ahead. And the recovery continues to be slow, indeed much too slow.

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