The Evolution of Monetary Policy: More Art and Less Science


By Giovanni Dell’Ariccia and Karl Habermeier

The global financial crisis shook monetary policy in advanced economies out of the almost complacent routine into which it had settled since Paul Volcker’s Fed beat inflation in the United States in the early 1980s.

Simply keep inflation low and stable, target a short-term interest rate, and regulate and supervise financial institutions, the mantra went, and all will be well.

Of course many scholars and policymakers, especially in emerging markets, were skeptical of this simple creed. But they did not make much headway against a doctrine seemingly well-buttressed by sophisticated theoretical models, voluminous empirical research, and over 20 years of “Great Moderation” —low inflation and output volatility. All of that has changed since the crisis, and ideas that were once marginal have now moved to center stage.

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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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U.S. Monetary Policy and Its Effects on Latin America


Alejandro WernerBy Alejandro Werner

(Version in Español and Português)

Some basic realities seem to be getting lost in the debate over the Fed’s “exit” from unconventional monetary policy and its impact on Latin America.

First, the still-loose stance makes sense. U.S. inflation is too low, the output gap too large, and the labor market too weak. And even during tapering, the Fed’s stance will remain highly loose. The 10-year Treasury rate, adjusted for core inflation, is about 230 basis points below its 30-year average and the inflation-adjusted Fed funds rate is 320 basis points below. These rates are likely to remain below their 30-year average for at least the next two to three years.

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Turkey: How To Boost Growth Without Increasing Imbalances


by Isabel Rial, Suchanan Tambunlertchai, and Alexander Tieman

(Version in Türk)

Actual and Current Trend accountTurkey has received well-deserved praise for its growth performance over the last decade. Yet along with this success story has come a steady widening of the current account deficit, projected to come out at 7.4 percent of GDP in 2013. The counterpart of this deficit is a reliance on external financing, much of which is of a short-term nature, highlighting the Turkish economy’s main problem at the moment.

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International Policy Coordination: The Loch Ness Monster


By Olivier Blanchard, Jonathan D. Ostry, and Atish R. Ghosh

International policy coordination is like the Loch Ness monster: much discussed but rarely seen. Going back over the decades, and even further in history to the period between the Great Wars, coordination efforts have been episodic.

Coordination seems to occur spontaneously in turbulent periods, when the world faces the prospect of some calamitous outcome and the key players are seeking to avoid cascading negative spillovers. In quieter times, coordination is rarer—though not unheard of; the Louvre and Plaza accords are examples.

Today, policy coordination has resurfaced as a hot topic: while the worst of the global financial crisis is behind us, no one would claim that a return to “Great Moderation” is in the cards, and policymakers around the globe appear worried about policy transmissions across many dimensions.

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Monetary Policy Will Never Be the Same


WEOBy Olivier Blanchard

(Version in Español)

Two weeks ago, the IMF organized a major research conference, in honor of Stanley Fischer, on lessons from the crisis. Here is my take.   I shall focus on what I see as the lessons for monetary policy, but before I do this, let me mention two other important conclusions.

One, having your macro house in order pays off when there is an (external) crisis.  In contrast to previous episodes, wise fiscal policy before this crisis gave emerging market countries the room to pursue countercyclical fiscal policies during the crisis, and this made a substantial difference.

Second, after a financial crisis, it is essential to rapidly clean up and recapitalize the banks. This did not happen in Japan in the 1990s, and was costly.  But it did happen in the US in this crisis, and it helped the recovery.

Now let me now turn to monetary policy, and touch on three issues: the implications of the liquidity trap, the provision of liquidity, and the management of capital flows.

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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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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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Fixing the Financial Sector: A Change the UK Must Bank On


Krishna SrinivasanBy Krishna Srinivasan

The UK economy is a long way from a strong and durable recovery. Growth has been flat for more than two years now, per capita income is about 7 percent below its pre-crisis peak, unemployment is elevated at 7.8 percent, with youth unemployment alarmingly high at 21 percent, and credit to the economy remains severely constrained.

Recent data are, however, encouraging, and policies should capitalize on the nascent signs of recovery to secure strong growth and rebalance the economy.  Fixing the financial sector, including by addressing banks’ asset quality, is a pre-requisite for a durable UK recovery. See the IMF’s assessment of the UK economy.

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