Taper Tantrum or Tedium: How U.S. Interest Rates Affect Financial Markets in Emerging Economies


By Alexander Klemm, Andre Meier, and Sebastián Sosa

(Version in Español)

Governments in most emerging economies, including in Latin America, have reduced their exposure to U.S. interest rates over the past decade, by issuing a greater share of public debt in domestic currencies.

Even so, sudden changes in U.S. interest rates still have the power to roil financial markets in emerging economies. Witness last year’s “taper tantrum”—when the Fed hinted at the possibility of tapering its bond purchases sooner than previously expected, causing bond yields to rise sharply. Continue reading

U.S. Interest Rates: The Potential Shock Heard Around the World


By Serkan Arslanalp and Yingyuan Chen

As the financial market turbulence of May 2013 demonstrated, the timing and management of the U.S. Fed exit from unconventional monetary policy is critical. Our analysis in the latest Global Financial Stability Report  suggests that if the U.S. exit is bumpy (Figure 1), although this is a tail risk and not our prediction, the result could lead to a faster rise in U.S long-term Treasury rates that impacts other bond markets. This could have implications not only for emerging markets, as widely discussed, but, also for other advanced economies.

figure 1

Indeed, historical episodes show that sharp rises in US treasury rates lead to increases in government bond yields across other major advanced economies.

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Building the Future: Jobs, Growth, and Fairness in the Arab World



2014MDNEW_04
By Christine Lagarde

(Version in عربي and Français)

Returning from Amman, where we just wrapped up a conference on the future of the Arab countries in transition, I am truly energized by the optimistic spirit that I encountered. Following on the heels of my visit to Morocco, it was an extraordinary couple of days of better understanding the people and the challenges they confront in this fascinating region.

Christine Lagarde, IMF Managing Director, speaks to Syrian refugee woman during visit to Syrian al-Za'atari refugee camp in Mafraq city

IMF Managing Director Christine Lagarde speaks to Syrian refugee women at al-Za’atari refugee camp in Mafraq, Jordan. Photo: Pool/Ali Jarekjiali Jarekji/AFP/Getty Images

I did not start my visit to Jordan in a conference room, but at the Za’atari refugee camp. It is now home—hopefully a temporary one—to over 100,000 Syrians who fled the bloody conflict in their country. I saw firsthand how these refugees cope under extraordinarily difficult circumstances—and how Jordan, the region, and the international
community are coming together. It is heartening to see how Jordanian hospitality and determined support from UN agencies and many other aid organizations are preventing a bad situation from becoming even worse. But more help is direly needed. We at the IMF are doing our own part, by flexibly supporting Jordan with a $2.1 billion loan. Continue reading

Are Banks Too Large? Maybe, Maybe Not


By Luc Laeven, Lev Ratnovski, and Hui Tong

Large banks were at the center of the recent financial crisis. The public dismay at costly but necessary bailouts of “too-big-to-fail” banks has triggered an active debate on the optimal size and range of activities of banks.

But this debate remains inconclusive, in part because the economics of an “optimal” bank size is far from clear. Our recent study tries to fill this gap by summarizing what we know about large banks using data for a large cross-section of banking firms in 52 countries.

We find that while large banks are riskier, and create most of the systemic risk in the financial system, it is difficult to determine an “optimal” bank size. In this setting, we find that the best policy option may not be outright restrictions on bank size, but capital—requiring  large banks to hold more capital—and better bank resolution and governance.

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Reducing Risks in Asia with Macroprudential Policies


Edda ZoliBy Edda Zoli

(Version in 中文, and 日本語)

Booming real estate markets, rapid credit growth and—at least before the Fed’s tapering announcement last year—sustained capital inflows have raised financial stability challenges across many parts of Asia. To address them, policymakers have increasingly made use of macroprudential policies that address the stability of the financial system as a whole rather than that of individual institutions. In some cases they have also resorted to capital flow management measures to counter large capital inflows.

As new analysis in the IMF Asia and Pacific Department’s latest Regional Economic Outlook finds, macroprudential policies, especially measures related to the housing market, have helped mitigate the buildup of financial risks in Asia. In the event of sharp decreases in credit and asset prices going forward, however, it may become useful to ease certain of these measures to avoid excessive deleveraging.

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China’s Growth: Why Less is More


Steve BarnettBy Steven Barnett

(Version in 中文)

Less growth in China today will mean higher income in the future. So rather than worry, we should welcome the slowdown in China’s economy. Why? Because by favoring structural reforms over short-term stimulus, China’s leadership is illustrating their commitment to move to a more balanced and sustainable growth model.

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Japan’s Three Arrows―Will They Fly?


Jerry SchiffBy Jerry Schiff 

(Versions in 日本語l and 中文)

Discussions in Japan of the “three arrows” of Abenomics—the three major components of Prime Minister Shinzo Abe’s economic plan to reflate the economy—are rampant among its citizens as well as economists, journalists and policy-makers worldwide. Even J-Pop groups are recording paeans to the economic policy named after the newly-elected premier.  It is clear that “Abenomics” has been a remarkable branding success. But will it equally be an economic triumph?

We think it can be, and initial signs are positive.  But such success is not assured. It will require difficult decisions as the country moves into largely uncharted territory. And much will depend on changing expectations within the country.

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The U.S. Housing Market’s Road to Recovery


Jarkko TurunenBy Jarkko Turunen

(Version in Español)

A year ago, we were very concerned about lingering weakness in the U.S. housing market, which we saw as a major obstacle to the economic recovery.

But what a difference a year makes! As our latest report on the U.S. economy points out, the housing market recovery has been stronger than expected, and is providing a significant boost to private domestic demand and economic growth.

What has changed in the last 12 months? House prices have rebounded sharply and are currently about 7-12 percent above their level a year ago. Home sales increased by more than 15 percent over the same time period. Thanks to higher house prices and the positive effects of government housing finance programs, fewer homeowners are “underwater” (owe more on their mortgages than their houses are worth) or are behind on their mortgage payments, and fewer houses are entering foreclosure.

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U.S. Fiscal Policy: A Tough Balancing Act


Deniz IganBy Deniz Igan

(Version in Español)

Much has changed on the fiscal front since we started worrying about U.S. fiscal sustainability. The federal government budget deficit has fallen sharply in recent years―from almost 12 percent of GDP in 2009 to less than 7 percent in 2012. And recent budget reports show that the deficit is shrinking faster than expected only a few months ago, to a projected 4½ percent of GDP for the current fiscal year, which ends September 30. Plus, health care cost growth has slowed down dramatically since the Great Recession, alleviating the pressure on public health care programs at least temporarily.

Does this mean we can stop worrying? Not quite. Recent developments certainly mean that things are better than we thought just a few years ago and the fiscal adjustment needed to restore sustainability is smaller. But if the choice and timing of policy measures is not right, the deficit reduction may turn out to be too much in the short run—stunting the economic recovery—and not enough in the long run.

So, in our recent annual check-up of the U.S. economy, our advice is to slow the pace of fiscal adjustment this year—which would help sustain growth and job creation—but to speed up putting in place a medium-term road map to restore long-run fiscal sustainability.

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F&D Magazine: A Mother’s Example


By: Jeffrey Hayden, Editor-in-Chief

FD June CoverNazareth College was my second home. As a child, I spent countless evenings roaming the small liberal arts college in Rochester, N.Y., where my mother headed the office of graduate studies and continuing education.­

Most of her students worked day jobs, attending class at night. For her, this made for late hours at the office—and for a complex juggling act: off to work in the morning to manage a staff, drop everything at 3 p.m. to rush home to fix dinner for the family, and then back to work around 5 p.m.—with me in tow—to staff the office until evening classes let out. Sleep and then repeat. This was the rhythm of my childhood.­

I thought a lot about those days as we put together the special feature on women at work in this issue of F&D—about her example, and about the many women who share in her experience and the many who do not.­

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