From Taper Tantrum to Bund Bedlam

By Yingyuan Chen, David Jones and Sanjay Hazarika

(Versions in 中文 and deutsch)

Global financial markets traditionally take their cue from the United States. Unexpected Fed rate hikes have unsettled global markets in the past. The entire global financial system threw a tantrum when then Fed Chairman Ben Bernanke merely suggested in May 2013 that the end to bond-buying and other policies could soon begin. However for the past year, the gears of global markets seem to have been thrown into reverse — it is German government bonds, known as Bunds, rather than U.S. bonds, known as Treasuries, that appear to be driving prices in global bond markets. This role reversal could add a new layer of complexity to investor calculations as they prepare for the beginning of Fed interest rate hikes, which are expected later in 2015. Also, as developments in Greece lead to rises and falls in Bund and Treasury yields, this is a trend worth keeping an eye on.

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Behind the News in Greece and China, Moderate Growth Continues

 By Olivier Blanchard

(Versions in Español and عربي)

Today we published the World Economic Outlook Update.

But first, let me talk about the elephant in the room, namely Greece.

The word elephant may not be right: As dramatic as the events in Greece are, Greece accounts for less than two percent of the Eurozone GDP, and less than one half of one percent of world GDP.
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Flash Crashes and Swiss Francs: Market Liquidity Takes a Holiday


By José Viñals

Financial market liquidity can be fleeting. The ability to trade in assets of any size, at any time and to find a ready buyer is not a given.  As discussed in some detail last fall in this blog, a number of factors, including the evolving structure of financial markets and some regulations appear to have pushed liquidity into a new realm: markets look susceptible to episodes of high price volatility where liquidity suddenly vanishes.

In our April 2015 Global Financial Stability Report we identify a new aspect to the problem:  asset price correlations have risen sharply in the last five years across all major asset classes (see figure). Continue reading

Act Local, Solve Global: The $5.3 Trillion Energy Subsidy Problem

By Benedict Clements and Vitor Gaspar

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

US$5.3 trillion; 6½ percent of global GDP—that is our latest reckoning of the cost of energy subsidies in 2015. These estimates are shocking. The figure likely exceeds government health spending across the world, estimated by the World Health Organization at 6 percent of global GDP, but for the different year of 2013. They correspond to one of the largest negative externality ever estimated. They have global relevance. And that’s not all: earlier work by the IMF also shows that these subsidies have adverse effects on economic efficiency, growth, and inequality.

What are energy subsidies

We define energy subsidies as the difference between what consumers pay for energy and its “true costs,” plus a country’s normal value added or sales  tax rate. These “true costs” of energy consumption include its supply costs and the damage that energy consumption inflicts on people and the environment. These damages, in turn, come from carbon emissions and hence global warming; the health effects of air pollution; and the effects on traffic congestion, traffic accidents, and road damage. Most of these externalities are borne by local populations, with the global warming component of energy subsidies  only a fourth of the total (Chart 1).

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European Life Insurers: Unsustainable Business Model

By Reinout De Bock, Andrea Maechler, and Nobuyasu Sugimoto

(Versions in Français and deutsch)

Low interest rates in the euro area pose substantial challenges to the life insurance industry. Insurers—particularly in Germany and Sweden—offer their clients long-term policies, sometimes more than 30 years, without holding assets of a correspondingly long duration. Moreover, many policies contain generous return guarantees, which are unsustainable in today’s low interest rate environment.

In 2014, stress tests showed European life insurers are vulnerable to a “Japanese-like” scenario.

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How Much Finance Is Too Much: Stability, Growth & Emerging Markets

By Ratna Sahay, Martin Čihák, and Papa N’Diaye 

The world still lives in the shadow of the global financial crisis that began in the United States in 2008.  The U.S. experience shone a spotlight on the dangers of financial systems that have grown exponentially and beyond traditional banks. It triggered a rethinking of the extent and speed of the expansion of a country’s financial sector, and raised questions about which policies promote a safe financial system.

In our new study, we emphasize that the most commonly used indicator—bank credit—is not sufficient to measure the size and scope of a country’s financial development. We create a comprehensive index for over 170 countries to answer several policy questions from the perspective of emerging markets.

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Multi-Track Monetary Policies in Advanced Economies: What This Means for Asia

By James Daniel and Rachel van Elkan

Since mid-2014, diversity and divergence—applying to countries’ economic situations, policies and performance—have dominated global economic discussions. Differing economic performance in major advanced countries has led to divergent monetary policies.

Both the Bank of Japan and the European Central Bank have started significant expansions of their balance sheets, while the U.S. Federal Reserve has ended its bond-buying program and is expected to start raising rates. This has had many effects, in particular, contributing to a sharp depreciation of the Yen and the Euro against the U.S. dollar (see chart 1).

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