Building a Camaraderie of Central Bankers: How Monetary Policymakers in the Caucasus and Central Asia Can Learn From Each Other


Min ZhuBy Min Zhu

(Versions in 中文Русский)

The world’s central bankers are certainly in the news these days. Not a week goes by without the Fed, the European Central Bank or the Bank of Japan taking big and often unprecedented actions to fight deflation, preserve financial stability, or address mediocre growth. We tend to forget, however, that these are not the only central banks that are struggling to adapt their policies to changing circumstances in our connected world.

Take the Caucasus and Central Asia — Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. Central banking in these former Soviet republics rarely makes international headlines. But figuring out how best to design and run monetary policy is no less a challenge than in the United States or the euro zone.

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A Mirage, Not An Oasis: Easy Money and Financial Markets


By Fabio Cortes, David Jones and Evan Papageorgiou

Low interest rates and other central bank policies in the United States have sent investors looking for higher returns on their investments. Money is pouring into mutual funds and exchange-traded funds, which is fueling a mispricing of credit and a build-up of risks to liquidity in the markets—the ability to trade in assets of any size, at any time, and to find a ready buyer.

Mutual funds and exchange-trade funds are the largest owners of U.S. corporate and foreign bonds (Chart 1). This means they provide a lot of credit to grease the wheels of the financial system because they have taken investors’ money and lent it to corporates.

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The New Global Imbalance: Too Much Financial Risk-Taking, Not Enough Economic-Risk Taking


GFSR By José Viñals

(Versions in Español中文)

I have three key messages for you today:

1. Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges.

2. Banks are safer but may not be strong enough to vigorously support the recovery. And risks are shifting to the shadow banking system in the form of rising market and liquidity risks. If left unaddressed, these risks could compromise global financial stability.

3. In order to address this new global imbalance, we must promote economic risk-taking by improving the transmission of monetary policy to the real economy. And we must address financial excesses through better micro- and macroprudential policies.

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U.S. Monetary Policy: 3-2-1, Interest Rate Liftoff!


By Francesco Columba and Jarkko Turunen

(Versión en español)

photo: Patrick H. Corkery/DoD/Sipa USA/Newscom

photo: Patrick H. Corkery/DoD/Sipa USA/Newscom

After more than five years of exceptionally low interest rates, the U.S. Fed is getting closer to the point of managing a liftoff of policy interest rates from close to zero. As of today, liftoff is expected to take place by around mid-2015.

But this is not set in stone. The Fed has repeatedly emphasized that the timing will depend on the state of the U.S. economy. If things look better, policy rates may increase earlier. Conversely, weaker than expected data may well mean that interest rates will move up later.

In our view, based on our most recent economic projections, there is some scope for policy rates to stay at zero for a little while longer than mid-2015, given the remaining slack in the labor market and still low inflation.

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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

The New Frontier: Economies on the Rise


Min ZhuBy Min Zhu

(Version in 中文,FrançaisPortuguês, and Español)

There is a group of fast-growing low-income countries that are attracting international investor interest—frontier economies. Understanding who they are, how they are different, and how they have moved themselves to the frontier matters for the global economy because they combine huge potential with big risks. 

Get to know them  

The first thing to note is that some of these countries already have moved to the lower-middle income group. While a working definition of frontier economies is subject to further discussion, broadly speaking, these countries have been deepening their financial markets, such as Bangladesh, Kenya, Nigeria, Mozambique, and Vietnam.

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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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