The Evolution of Monetary Policy: More Art and Less Science


By Giovanni Dell’Ariccia and Karl Habermeier

(Versions in Español)

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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Emerging Asia: At Risk of the “Middle-Income Trap”?


ASinghBy Anoop Singh

(Versions in 中文 and 日本語)

Emerging economies in Asia have weathered the global financial crisis relatively unscathed and appear to be on track for continued strong growth this year and the next. Perhaps because the region has been doing rather well, policymakers’ concerns have increasingly shifted towards medium-term risks: could growth and fast convergence to living standards in advanced economies—come to an end?

In fact, while the economic performance of emerging economies in Asia remains undoubtedly strong in international comparison, it has already shown signs of gradual weakening.

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Tharman Sees “Greater Global Policy Resolve”


“Although the economic environment has weakened, the policy resolve has strengthened.” This is how Tharman Shanmugaratnam, Singapore’s Deputy Prime Minister and Minister for Finance , who is Chair of the IMF’s policy-setting committee, described the outcome of the IMF-World Bank annual meetings in Tokyo.

Growth is slower than anyone expected,” he admitted in a video interview.  “It is slower in Europe, it is not as fast as it should be in the United States, not as fast as it should be to bring unemployment down, and it is slowing in Asia to a greater extent than was expected. Tharman is chair of the 24-member IMFC.

“But we are now in a much better situation than six months ago when it comes to policy solutions.” He said there had been major steps forward in Europe “despite some disagreement on individual pieces.”  But underlying problems in the Eurozone, budget problems in the United States, and structural problems in global economy are longer term problems and “cannot be fixed quickly.”

For a quick brief on the outcomes from the meetings in Tokyo, take a look at:

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Imagining If Key Foreign Banks Start Reducing Their Exposure in Asia


By Anoop Singh

European banks play an important role in supplying credit to several Asian economies. What happens if they start reducing their exposure to the region?

The largest borrowers from European banks are Australia, Hong Kong SAR, Korea, Malaysia, New Zealand, Singapore, and Taiwan Province of China, while China, India, and the economies of South East Asia generally have smaller liabilities.

Among European banks, those from the United Kingdom have a particularly significant presence in Asia. For most regional economies, the nonbank private sector—businesses and households—is the main recipient of credit from foreign banks as a whole.

Prominent role

European banks play a prominent role in the areas of trade credit and specialized project financing. In several Asian economies, however, lending by local subsidiaries and branches is funded primarily by local deposits, reducing potential deleveraging pressures.

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Closer, Ever Closer


By Anoop Singh

(Version in 中文)

Here’s the good news: thanks to relatively strong fundamentals and good policies,  Asian economies have coped well with the global market turbulence of recent years. Now the bad: a major financial shock—say, of type ignited by the bankruptcy of U.S. investment bank Lehman Brothers in 2008—is likely to have a substantial impact on Asia.  The reason: Asia’s increasing financial interconnectedness.

Over the past two decades—in line with the region’s growing role in the global economy—Asia’s equity markets have become increasingly sensitive to global financial developments.   More specifically, we have discovered that equity returns in Asia generally now move in tandem with those in systemic economies.  (By systemic economies, we are talking here about those countries—such as the United States and the United Kingdom which are home to major, global, financial centers such as Wall Street and the City of London.)

How do we measure that degree of financial interconnectedness?  Or put another way, how do we measure the relationship—if any—between those Asian equity returns and the performance of systemic economies?

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More Asian Geese Ready to Fly


(Version in 日本語)

Like geese flying in formation, the successive waves of Asian countries achieving economic takeoff and emerging or developed market status, has been likened to those migratory birds in flight.  If this model is accurate, more Asian geese are set to join the flock of economically successful nations.

The “Flying Geese Paradigm” or ganko keitai was first conceived of  by Japanese economist, Kaname Akamatsu in the 1930s as a way of explaining East Asian industrial development.  According to Akamatsu, the lead goose in the formation, was Japan.  The second tier consisted of newly industrialized economies—South Korea, Taiwan Province of China, Singapore, and Hong Kong SAR.  Following hot on their tails were the ASEAN countries, such as Indonesia, Malaysia, the Philippines and Thailand.  More recent additions to the flock are China and India

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Asia and the IMF: Toward a Deeper Engagement


Update: IMF Managing Director Dominique Strauss-Kahn delivered speeches in both Singapore and Beijing. In Singapore he spoke of a leadership role for Asia, while in Beijing he addressed how China is leading the world out of recession and the need for further reform of China’s dynamic economy.

By Anoop Singh

(Version in 日本語)

Asia’s standing and influence continues to grow and the IMF is working with the region to help it meet its full economic potential as it recovers from the global crisis.  In mid-November, the  Managing Director of the IMF, Dominique Strauss-Kahn,  begins a six-day trip to Asia.  First he’s in Singapore attending the 16th Asia-Pacific Economic Cooperation (APEC) Finance Ministers’ Meeting, and then goes on to China November 16-17, one of the region’s most dynamic economies. 

In Singapore, the Managing Director co-chairs a roundtable discussion on economic policy challenges facing the region and will deliver a lecture on the role of Asia in reshaping the post-crisis global economy. In China, he will discuss with the authorities their policy response to the global crisis and ask senior government officials about their outlook for the Chinese and world economies.

The visit is another sign of the importance which the IMF attaches to its relationship with  Asia as the region leads the world away from crisis toward global recovery.  It will also provide Asia and the IMF an opportunity to deepen their engagement.

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