The Ties That Bond Us: What Demand For Government Debt Can Tell Us About the Risks Ahead


by Serkan Arslanalp and Takahiro Tsuda

It’s not news that emerging markets can be vulnerable to bouts of market volatility. Investors often pull sudden stops—they stop buying or start selling off their holdings of government bonds.

But what has become apparent in recent years is that advanced economy government bond markets can also experience investor outflows, and associated runs. At the same time, some traditional and new safe haven countries have seen their borrowing costs drop to historic lows as they experience rising inflows from foreign investors.

Our new research shows that advanced economies’ exposure to refinancing risk and changes in government borrowing costs depend mainly on who is holding the bonds— the demand side for government debt.

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Capital Controls: When Are Multilateral Considerations of the Essence?


By Jonathan D. Ostry

One of the main arguments against capital controls is that, though they may be in an individual country’s interest, they could be multilaterally destructive in the same way that tariffs on goods can be destructive.

A particular concern is that a country might impose controls to avoid necessary macroeconomic and external adjustment, in turn shifting the burden of adjustment onto other countries.

A proliferation of capital controls across countries, moreover, may not only undercut warranted adjustments of exchange rates and imbalances across the globe, it may lead in the logical extreme to a situation of financial autarky or isolation in the same way that trade wars can shrink the volume of world trade, seriously damaging global welfare.

So should multilateral considerations trump national interests?

Possible rationales for controls

To begin, it is worth reviewing some of the reasons why countries may wish to impose controls.

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“Macro…, what?!” The New Buzz on Financial Stability


José Viñals (l) and Nicolás Eyzaguirre

By José Viñals and Nicolás Eyzaguirre

(Version in Español)

Just a few years ago, “Macro…, what?!” would have been a typical reaction to hearing the technical term that today is the talk of the town among financial regulators.

But in the aftermath of the global financial crisis, macroprudential policy—which seeks to contain systemic risks in the financial system—has indeed come to be an important part of the overall policy toolkit to preserve economic stability and sustain growth.

For example, a number of countries, especially emerging markets, have been relying on macroprudential policies (such as loan-to-value or debt-to-income ratios, or countercyclical loan loss provisions) to rein in rapid credit growth, which—if unchecked—could destabilize the financial system and, ultimately, bring about a recession and drive up unemployment.

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Blow, Bling and Bucks: IMF Work Against Money Laundering and Terrorist Financing


By Jody Myers

(Version in Français)

Drug traffickers, diamond smugglers, and terrorists’ financiers around the world have one thing in common: they abuse the financial system to “clean” the proceeds they have obtained from their illegal work, or to transfer funds to achieve their destructive aims. The former is known as money laundering and the latter as terrorist financing.

In the United States alone, profits from these crimes are estimated around $275 billion, excluding tax evasion.

Our research shows this dark side of the economy has destructive consequences for a country’s financial stability, economy, and governance.    Continue reading

Too Important to Fail?


By José Viñals

Over the past two years, disruptive failures, shotgun marriages, and government bailouts of some household names in the financial industry have placed the age-old issue of “too big to fail” at the center of financial sector policy discussions. As well, the Lehman bankruptcy and government support for AIG extended the “too-big-to-fail” notion from banks to include nonbank financial institutions. And in some cases, the financial institutions in distress were not even particularly big; rather, they were too interconnected, and too important for the functioning of the global financial system, to be allowed to fail.

We need to think about how to deal with such “too-important-to-fail” institutions for at least three reasons. 

  • When institutions are provided with implicit (and explicit) public support, they are apt to take on riskier activities than they otherwise would, with the knowledge that the government will step in if those risks turn out badly. This is called moral hazard
  • Well-run institutions are forced to compete with institutions that are implicitly guaranteed—or even directly financially supported—by the government. This makes for an unlevel playing field in the financial sector. 
  • Government support absorbs valuable public resources, arguably at the expense of more equitable and productive public spending; it could also endanger the fiscal stability of a country.

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