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.

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Time For A Spring Cleaning: The Global Economy Will Thank You


Jose Vinals

by José Viñals

Version in Español

It is still winter in the northern hemisphere, but there is never a bad time for spring cleaning. I suggest that policymakers de-clutter their to-do lists by focusing on three priorities.

These policies will help economies grow and will significantly improve financial and monetary stability in 2013 and beyond.

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The Long-term Price of Financial Reform


by André Oliveira Santos and Douglas J. Elliott

In response to the global crisis, policymakers around the world are instituting the broadest reform of financial regulation since the Great Depression.

Some in the financial industry claim the long-run economic costs of these global reforms outweigh the benefits. But our new research strongly suggests the opposite—the reforms are well worth the money.

Granted, just as adding fenders, safety belts, airbags, and crash avoidance features can make cars slower, we know that additional safety measures can slow down the economy in years when there is no crisis. The payoff comes from averting or minimizing a disaster.

Five years after the onset of the current crisis, we sadly know all too well the cost in terms of economic growth, so the potential gains in avoiding future crises are very large.

Our study finds that the likely long-term increase in credit costs for borrowers is about one quarter of a percentage point in the United States and lower elsewhere. This is roughly the size of one small move by the Federal Reserve or other central banks. A move of that size rarely has much effect on a national economy, suggesting relatively small economic costs from these reforms.

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Mind The Gap: Policies To Jump Start Growth in the U.K.


By Ajai Chopra

The U.K. economy has been flat for nearly two years. This stagnation has left output per capita a staggering 14 percent below its precrisis trend and 6 percent below its pre-crisis level.

Weak growth has kept unemployment high at 8.1 percent, with youth unemployment an alarming 22 percent.

The effects of a persistently weak economy and high long-term unemployment can reverberate through a country’s economy long into the future—commonly referred to by economists as hysteresis.

Our analysis of such hysteresis effects shows that the large and sustained output gap, the difference between what an economy could produce and what it is producing, raises the danger that a downturn reduces the economy’s productive capacity and permanently depresses potential GDP. 

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How to Exit the Danger Zone: IMF Update on Global Financial Stability


By José Viñals

(Versions in  عربي, 中文, EspañolFrançaisРусский日本語)

Since September of last year, risks to global financial stability have deepened, notably in the euro area.

However, over the past few weeks, markets have been encouraged by measures to provide liquidity to banks and sovereigns in the euro area. This recent improvement should not be taken for granted, as some sovereign debt markets remain under stress, and as bank funding markets are on life support from the European Central Bank (ECB).

Main sources of risk

Many of the root causes of the euro area crisis still need to be addressed before the system is stabilized and returns to health. Until this is done, global financial stability is likely to remain well within the “danger zone,” where a misstep or failure to address underlying tensions could precipitate a global crisis with grave economic and financial consequences.

Despite the recent improvements, sovereign financing stress has increased for many countries—with almost two-thirds of outstanding euro area bonds at spreads in excess of 150 basis points—and financing prospects are challenging. Markets remain very volatile and long-term foreign investors have sharply reduced their exposure to a number of euro area debt markets, including some in the core. Keeping these investors involved is essential to stabilizing markets.

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2011 In Review: Four Hard Truths


By Olivier Blanchard

(Versions in  عربي中文, EspañolFrançaisРусский, 日本語)

What a difference a year makes …

We started 2011 in recovery mode, admittedly weak and unbalanced, but nevertheless there was hope. The issues appeared more tractable: how to deal with excessive housing debt in the United States, how to deal with adjustment in countries at the periphery of the Euro area, how to handle volatile capital inflows to emerging economies, and how to improve financial sector regulation.

It was a long agenda, but one that appeared within reach.

Yet, as the year draws to a close, the recovery in many advanced economies is at a standstill, with some investors even exploring the implications of a potential breakup of the euro zone, and the real possibility that conditions may be worse than we saw in 2008.

I draw four main lessons from what has happened.

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Nanjing and the New International Monetary System


By Dominique Strauss-Kahn

(Version in 中文)

I am delighted to be back in China this week for a high-level seminar in Nanjing on the international monetary system. Every time I come to this part of the world, I am impressed by the dynamism of the economies and the optimism of the people. The future is here.

The region’s economic performance over the past few decades has been nothing short of remarkable. Asia now accounts for about a third of the global economy, up from under just a fifth in 1980. This trend has been reinforced by the crisis, with the emerging market powerhouses leading the global recovery.

Asia has also made tremendous progress with poverty reduction. China alone has pulled hundreds of millions of people out of poverty over the past few decades. Such a feat has never before been accomplished in the history of human civilization.

But to sustain this progress, Asia needs to grapple with numerous challenges today, among them the need to deal with overheating pressures and volatile capital inflows. And this relates directly to our discussion at Nanjing. Continue reading

The Future of Macroeconomic Policy: Nine Tentative Conclusions


By Olivier Blanchard

(Version in Français, Español)

The global economic crisis taught us to question our most cherished beliefs about the way we conduct macroeconomic policy. Earlier I had put forward some ideas to help guide conversations as we reexamine these beliefs. I was heartened by the wide online debate and the excellent discussions at a conference on post-crisis macroeconomic policy here in Washington last week. At the end of the conference, I organized my concluding thoughts around nine points. Let me go through them and see whether you agree or not. Continue reading

Rewriting the Macroeconomists’ Playbook in the Wake of the Crisis


By Olivier Blanchard

Before the global economic crisis, mainstream macroeconomists had largely converged on a framework for the conduct of macroeconomic policy. The framework was elegant, and conceptually simple. Caricaturing just a bit, it went like this:

  • The essential goal of monetary policy was low and stable inflation. The best way to achieve it was to follow an interest rate rule. If designed right, the rule was not only credible, but delivered stable inflation and ensured that output was as close as it could be to its potential. Continue reading
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