U.S. Economy Returning to Growth, but With Pockets of Vulnerability

2014MDNEW_04By Christine Lagarde 

IMF staff have just concluded their annual health check of the U.S. economy, and released their concluding statement.

This year we have also undertaken a Financial Sector Assessment Program with the United States. We conduct these once every 5 years for systemically important countries and it is a comprehensive exercise looking at the whole U.S. financial system.

Given this important work, we have focused our review of the U.S. economy on financial stability risks and the appropriate policies to mitigate them, as well as looking at recent movements in the U.S. dollar and the timing, form, and impact of interest rate normalization by the Fed.

A more detailed report on the U.S. economy and on the financial sector will be available on July 8.

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Reigniting Strong and Inclusive Growth in Brazil

2014MDNEW_04By Christine Lagarde 

(Versions in Español and Português)

Brazil has made remarkable social gains over the past decade and a half. Millions of families have been lifted from extreme poverty, and access to education and health has improved thanks to a series of well-targeted social interventions, such as Bolsa Familia, the conditional cash transfer program. I was privileged to see some of this tangible progress during my visit to Brazil last week.

I met with Tereza Campello, Brazil’s Minister for Social Development, who explained the network of social programs in the country, and guided us on a visit to Complexo do Alemão—a neighborhood and a group of favelas in the North Zone of Rio de Janeiro. We got there after a ride on the recently built cable car, which links several neighborhoods on the hills to the North Zone. This is a great example of infrastructure that has contributed immensely to improving the economic opportunities of people, who now have a quick way to move around and connect to the larger city. The stations themselves are also focal points of the efforts aimed at improving the daily lives of the people of Rio de Janeiro, since they house important services such as the youth center, a social assistance center, a public library, a training center for micro-entrepreneurs, and even a small branch of the bank that distributes the Bolsa Familia monthly grants.

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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

Ten Take Aways from the “Rethinking Macro Policy: Progress or Confusion?”

blanchBy Olivier Blanchard

On April 15-16, the IMF organized the third conference on “Rethinking Macro Policy.

Here are my personal take aways.

1. What will be the “new normal”?  

I had asked the panelists to concentrate not on current policy challenges, but on challenges in the “new normal.” I had implicitly assumed that this new normal would be very much like the old normal, one of decent growth and positive equilibrium interest rates. The assumption was challenged at the conference.

On the one hand, Ken Rogoff argued that what we were in the adjustment phase of the “debt supercycle.” Such financial cycles, he argued, end up with debt overhang, which in turn slows down the recovery and requires low interest rates for some time to maintain sufficient demand.  Under that view, while it may take a while for the overhang to go away, more so in the Euro zone than in the United States, we should eventually return to something like the old normal.

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Managing Capital Flows in Frontier Economies

By Jonathan D. Ostry, Atish R. Ghosh, and Mahvash S. Qureshi 

There has been a remarkable increase in financial flows to frontier economies from private sources which, in relation to their economic size, are now on par with those to emerging economies (see chart).

Ostry Capital Flows

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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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Financial Risks Rise Amid Uneven Global Economic Recovery


By José Viñals

(Versions in عربي and Español)

The three main messages from this Global Financial Stability Report are:

  1. Risks to the global financial system have risen since October and have rotated to parts of the financial system where they are harder to assess and harder to address.
  2. Advanced economies need to enhance the traction of monetary policies to achieve their goals, while managing undesirable financial side effects of low interest rates.
  3. To withstand the global crosscurrents of lower oil prices, rising U.S. policy rates, and a stronger dollar, emerging markets must increase the resilience of their financial systems by addressing domestic vulnerabilities.

Let me now discuss these findings in detail. 

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