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.

Continue reading

China: Size Matters


By Steven Barnett

(Version in  中文 and  Español)

Mongolia’s economy grew nearly 12 percent last year, the United States around 2 percent. So Mongolia grew around 6 times faster than the United States, yet of course the United States contributed more to GDP growth—over 150 times more. Why, because size matters.

Let’s apply this logic to China. A bigger but somewhat slower growing China of the future will contribute about as much to global demand as the smaller but faster growing China of before. This is arithmetic: An economy that is twice as big can grow by ½ as much and contribute the same to global demand. By the way, China today is more than twice as big as it was a decade ago.

So, the good news is, even with slower growth, China will continue to be an engine of global output. Indeed, an even bigger engine than before.

Continue reading

Beyond Borders: Growth Challenges for Emerging Markets


By Alexander Culiuc and Kalpana Kochhar

(Versions in EspañolРусский, Português, and 中文)

A number of emerging market economies  have been on a rollercoaster since the U.S. Federal Reserve announced last May the eventual tapering of its asset purchase program. This is another reminder of how susceptible these economies remain to economic conditions outside their borders.

Much of the market movements to date have been short term in nature. But emerging markets know the end-game – interest rates in advanced economies will eventually go up, reducing the cheap external financing they have benefited from until now. And this is not the only external factor weighing on the growth prospects of emerging markets.

Continue reading

International Policy Coordination: The Loch Ness Monster


By Olivier Blanchard, Jonathan D. Ostry, and Atish R. Ghosh

International policy coordination is like the Loch Ness monster: much discussed but rarely seen. Going back over the decades, and even further in history to the period between the Great Wars, coordination efforts have been episodic.

Coordination seems to occur spontaneously in turbulent periods, when the world faces the prospect of some calamitous outcome and the key players are seeking to avoid cascading negative spillovers. In quieter times, coordination is rarer—though not unheard of; the Louvre and Plaza accords are examples.

Today, policy coordination has resurfaced as a hot topic: while the worst of the global financial crisis is behind us, no one would claim that a return to “Great Moderation” is in the cards, and policymakers around the globe appear worried about policy transmissions across many dimensions.

Continue reading

Monetary Policy Will Never Be the Same


WEOBy Olivier Blanchard

(Version in Español)

Two weeks ago, the IMF organized a major research conference, in honor of Stanley Fischer, on lessons from the crisis. Here is my take.   I shall focus on what I see as the lessons for monetary policy, but before I do this, let me mention two other important conclusions.

One, having your macro house in order pays off when there is an (external) crisis.  In contrast to previous episodes, wise fiscal policy before this crisis gave emerging market countries the room to pursue countercyclical fiscal policies during the crisis, and this made a substantial difference.

Second, after a financial crisis, it is essential to rapidly clean up and recapitalize the banks. This did not happen in Japan in the 1990s, and was costly.  But it did happen in the US in this crisis, and it helped the recovery.

Now let me now turn to monetary policy, and touch on three issues: the implications of the liquidity trap, the provision of liquidity, and the management of capital flows.

Continue reading

Scenes From A Central Bank: A Turkish Tale in Two Acts


By Robert Tchaidze and Heiko Hesse 

In mid 2010 the Turkish central bank decided to introduce a policy that increased uncertainty in interest rates hoping that would stop foreign investors who were pouring money into the country in search of a quick buck. That’s right. ‘Keep calm and carry on’ was replaced by ‘Keep them guessing.’

The Turkish economy was overheating.  Money poured into the country from foreign investors attracted by a strong economy and high yields. A lending boom resulted in excessive growth along with an appreciating exchange rate and widening current account deficit. While evidence of success, these kinds of capital inflows are a headache policymakers would rather avoid, as they expose a country to risks that affect the economy and financial system as a whole, while undermining the objective of controlling inflation.

Continue reading

Latin America: Riding the Global Financial Waves


By Gustavo Adler and Camilo E. Tovar

(Version in Español)

Latin America has a long history of accidents that have occurred while navigating turbulent financial international waters. With risks looming over the world economy, should the region worry about new global financial waves?

Global financial markets have seen frequent bouts of severe stress since 2008, although this isn’t really anything new for the region. Global financial shocks have occurred on average every 2½ years since 1990, with significant effects on Latin America.

But how costly are these shocks in terms of domestic output, and is Latin America better placed to cope with them this time?

In Chapter 3 of the IMF’s latest Regional Economic Outlook: Western Hemisphere, we analyze whether changes in underlying fundamentals have made the region more or less vulnerable over time. The analysis, which complements our work on the effects of terms-of-trade shocks, looks at what country features and policies make a difference. We focus here solely on the impact of the financial shocks by isolating the effect from commodity prices and global demand shocks.

Continue reading

How Iceland Recovered from its Near-Death Experience


 By Poul M. Thomsen

(Versions in Español and Français)

When I traveled to Reykjavik in October 2008 to offer the IMF’s assistance, the situation there was critical. The country’s three main banks—which made up almost the entire financial system—had just collapsed within a week of each other. The sense of fear and shock were palpable—few, if any, countries had ever experienced such a catastrophic economic crash.

There was a lot of concern that a disorderly depreciation of the exchange rate would be ruinous for households and companies if nothing was done or that deposit runs would cripple what was left of the financial system. The scale of the uncertainty was staggering―the three banks had assets worth more than 1,000 percent of GDP, and no one knew at that point how large the losses would turn out to be and how they would be divided between Icelanders and foreigners.

Today, three years later, it is worth reflecting on how far Iceland―a country of just 320,000 people―has come since those dark days back in 2008. Continue reading

The Other Rebalancing: Asia’s Quest for Inclusive Growth


By Anoop Singh

(Versions in 中文, 日本語)

For the past two or three decades, rising inequality—inequality of incomes, of economic outcomes and of economic opportunities—has taken a back seat to the goal of boosting overall growth. But growing discontent with the fallout of the global financial crisis has put inequality back on top of the policy agenda. While the symptoms may be different, tackling inequality is no less an issue in Asia.

Indeed, research shows that inequality can be counterproductive to sustaining longer-term growth. So, in increasingly turbulent global economic times, this gives added importance to promoting shared—or inclusive—growth in Asia that is more likely to be sustained.

This has been a major focus our latest Regional Economic Outlook, which we presented in Manila today. A great challenge for the government here, and for other countries across the region, is to raise living standards for a wide section of their populations. Continue reading

Follow

Get every new post delivered to your Inbox.

Join 670 other followers

%d bloggers like this: