Euro Area — “Deflation” Versus “Lowflation”


By Reza Moghadam, Ranjit Teja, and Pelin Berkmen

Recent talk about deflation in the euro area has evoked two kinds of reactions. On one side are those who worry about the associated prospect of prolonged recession. On the other are those who see the risk as overblown. This blog and the video below sift through both sides of the debate to argue the following:

  • Although inflation—headline and core—has fallen and stayed well below the ECB’s 2% price stability mandate, so far there is no sign of classic deflation, i.e., of widespread, self-feeding, price declines.
  • But even ultra low inflation—let us call it “lowflation”—can be problematic for the euro area as a whole and for financially stressed countries, where it implies higher real debt stocks and real interest rates, less relative price adjustment, and greater unemployment.
  • Along with Japan’s experience, which saw deflation worm itself into the system, this argues for a more pre-emptive approach by the ECB.

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Finish the Job on Financial Regulation


GFSRBy José Viñals

Brisbane and Basel may be 10,000 miles apart, but when it comes to financial regulation the two cities will be standing cheek by jowl.

At the next summit of the Group of Twenty advanced and emerging economies, to be held in Brisbane in November, political leaders will take the pulse of the global financial regulatory reform agenda, launched five years ago. The explicit goal of the Australian G-20 presidency is to finally complete these essential reforms. As Prime Minister Tony Abbott said today in Davos, “Financial regulation is always a work-in-progress, but these reforms now need to be finalized in ways that promote confidence without eliminating risk.”

I strongly support this extra push to create a safer financial system that can better support the needs of the real economy, and better protect taxpayers. For far too long, critics have been able to portray the G-20 reform agenda as a regulatory supertanker stuck in the shallow waters of technical complexity, financial industry pushback, and diverging national views. This image is increasingly off the mark.

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Recovery Strengthening, but Much Work Remains


WEOBy: Olivier Blanchard

(Versions in Español عربيРусский,  Français, and 中文 )

I want to take a moment today to remember our colleague Wabel Abdallah, who was our resident representative in Afghanistan and who, as many of you know, was killed in the terrorist attack in Kabul on Friday. We are mourning a colleague, a friend to many of us, above all a dedicated civil servant who represented the best the Fund has to offer, and gave his life in the line of duty, helping the Afghan people. Our hearts go out to his family and to the many victims of this brutal attack.

Let me now turn to our update of the World Economic Outlook and distill its three main messages:

First, the recovery is strengthening.  We forecast world growth to increase from 3% in 2013 to 3.7% in 2014.  We forecast growth in advanced economies to increase from 1.3% in 2013 to 2.2% in 2014.  And we forecast growth in emerging market and developing economies to increase from 4.7% in 2013 to 5.1% in 2014.

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The IMF Annual Research Conference: Economics of Crises―Past Experiences and Present Travails


2010 WEO BLANCHARD By Olivier Blanchard

Several years out from the global financial crisis, the world economy is still confronting its painful legacies. Many countries are suffering from lackluster recoveries coupled with high and persistent unemployment. Policymakers are tackling the costs stemming from the crisis, managing the transition from crisis-era policies, and trying to adapt to the associated cross-border spillovers.

Against this background, the IMF’s 14th Jacques Polak Annual Research Conference, entitled  “Crises: Yesterday and Today,”  to take place on November 7-8, will take stock of our understanding of past and present crises.

This year’s conference will be a special one as we shall honor Stanley Fischer’s many contributions to economic research and policy. Stan has extensively studied economic and financial crises, first as a faculty member at the Massachusetts Institute of Technology, and then as a policymaker with many hats over the years―the Chief Economist of the World Bank, the First Deputy Managing Director of the IMF, and the Governor of the Bank of Israel.

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Japan’s Abenomics: Time to Take Stock


ASinghBy Anoop Singh

Almost one year ago, the term Abenomics first surfaced in Japan. The idea of a coordinated policy effort to revive Japan’s economy and end deflation seemed a bold idea, but also a long-shot. Back in February, several young investment bankers told me that ending deflation within the next few years stood at most, a 20 percent chance.  They noted that they had never experienced rising prices in their lifetimes. By June they had upped the chances of success to 40 percent. With Abenomics approaching the one-year mark, is the new strategy working?

Lot of policy action

The year started with a flurry of new policy initiatives: in January, the Bank of Japan (BoJ) adopted a 2 percent inflation target, followed by new fiscal stimulus, and a decision to join  negotiations over the  Trans-Pacific Partnership (TPP), a proposal for a free trade agreement spanning countries from Australia, Brunei, to Chile, Canada, and the U.S.  Shortly after,  Haruhiko Kuroda took the helm at the Bank of Japan and introduced  Quantitative and Qualitative Monetary Easing—an aggressive plan to reach 2 percent inflation in about 2 years mainly through large-scale bond purchases. Just, a few days ago, the government agreed to go ahead with the consumption tax increase in 2014 and announced further fiscal stimulus to soften the growth impact. Discussions on growth reforms are next on the agenda, with a special Diet session starting this month. Plenty of action, but has this whirlwind of activity paid off?
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Transitions to Financial Stability: A Bumpy Ride


GFSRBy José Viñals

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

The global financial system faces several major transitions along the road to greater financial stability.  These transitions will be challenging because they are accompanied by substantial risks.

So what are these transitions?

  • The first one is the transition in the United States from a prolonged period of monetary accommodation towards a normalization of monetary conditions. Will this transition be smooth or bumpy?
  • Second, emerging markets face a transition to more volatile external conditions and higher risk premiums. What needs to be done to keep emerging markets resilient?
  • Third, the euro area is moving to a stronger union and stronger financial systems. This report focuses on the close links between the corporate and banking sectors. What are the implications of the corporate debt overhang for bank health?
  • Fourth, Japan is moving towards the new policy regime of Abenomics. The stakes are high. Will Japan’s policies be comprehensive enough to ensure stability?
  • And finally, there is the global transition to a safer financial system, where much remains to be done.

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Advanced Economies Strengthening, Emerging Market Economies Weakening


WEOBy Olivier Blanchard

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

The issue probably foremost on everyone’s mind, is the fiscal situation in the United States, and its potential implications.

While the focus is on the shutdown and the debt ceiling,  we should not forget the sequester, which is leading to a fiscal consolidation this year which is both too large and too arbitrary. The shutdown is yet another bad outcome, although one which, if it does not last very long, has limited economic consequences.  

Failure to lift the debt ceiling would, however, be a game changer.  Prolonged failure would lead to an extreme fiscal consolidation, and surely derail the U.S. recovery. But the effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets, both in the U.S. and abroad.   We see this as a tail risk, with low probability, but, were it to happen, it would have major consequences.

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