The Lowdown on U.S. Core Inflation


Yasser AbdihBy Yasser Abdih

There was a time when U.S. central bankers worried that inflation was too high, and they tried to bring it down. Now the opposite is true: the Federal Reserve is concerned that inflation has remained stubbornly low, and it’s trying to boost prices. The reason: persistently low inflation raises the risk that prices will actually start to decline, a dangerous condition known as deflation. That’s bad news because it makes people less willing to borrow and spend—anticipating lower prices, consumers will put off spending—and could also lead to a fall in wages. Continue reading

The Price of Oil and the Price of Carbon


By Rabah Arezki and Maurice Obstfeld

(Versions in عربي中文Français日本語,  Русский, and Español)

“The human influence on the climate system is clear and is evident from the increasing greenhouse gas concentrations in the atmosphere, positive radiative forcing, observed warming, and understanding of the climate system.”Intergovernmental Panel on Climate Change, Fifth Assessment Report

Fossil fuel prices are likely to stay “low for long.” Notwithstanding important recent progress in developing renewable fuel sources, low fossil fuel prices could discourage further innovation in and adoption of cleaner energy technologies. The result would be higher emissions of carbon dioxide and other greenhouse gases.

Policymakers should not allow low energy prices to derail the clean energy transition. Action to restore appropriate price incentives, notably through corrective carbon pricing, is urgently needed to lower the risk of irreversible and potentially devastating effects of climate change. That approach also offers fiscal benefits.

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“To Lean or Not to Lean?” That is the Question


By Stefan Laseen, Andrea Pescatori, and Jarkko Turunen

Academics and policy-makers alike have long struggled with the question of whether to use monetary policy to dampen asset price booms – whether to “lean against the wind” or not. Can officials identify emerging asset price bubbles, what are the implications of bursting them, and is monetary policy the appropriate response to potential bubbles? These questions have become even more important to the policy debate in the wake of the global financial crisis, which was preceded by an unsustainable boom in sub-prime mortgage lending and housing prices.

Given over six years of near zero policy interest rates, should the U.S. Fed now use interest rates to lean against potential financial stability risks that may have built up?

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U.S. Monetary Policy: Avoiding Dark Corners


By Ali Alichi, Douglas Laxton, Jarkko Turunen, and Hou Wang

Copyright : © fStop Images GmbH / AlamyA few weeks ago, the Fund suggested that the Federal Reserve could defer its first increase in the policy rate until it sees greater signs of wage or price inflation, with a gradual increase in the federal funds rate thereafter. Such a monetary policy strategy could help avoid the “dark corners” in which, as Olivier Blanchard has argued, small shocks can have potentially large effects. In this blog and accompanying working paper, we expand upon this idea. We also outline the potential benefits of an expanded communications toolkit.

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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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How Much Finance Is Too Much: Stability, Growth & Emerging Markets


By Ratna Sahay, Martin Čihák, and Papa N’Diaye 

The world still lives in the shadow of the global financial crisis that began in the United States in 2008.  The U.S. experience shone a spotlight on the dangers of financial systems that have grown exponentially and beyond traditional banks. It triggered a rethinking of the extent and speed of the expansion of a country’s financial sector, and raised questions about which policies promote a safe financial system.

In our new study, we emphasize that the most commonly used indicator—bank credit—is not sufficient to measure the size and scope of a country’s financial development. We create a comprehensive index for over 170 countries to answer several policy questions from the perspective of emerging markets.

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Close But Not There Yet: Getting to Full Employment in the United States


By Ravi Balakrishnan and Juan Solé

(Version in Español)

Last month’s report on U.S. jobs was disappointing, with far fewer jobs than expected added in March. A longer-term look at trends yields a different picture, however. Over the past year, U.S. job creation has been impressive. Payroll gains have averaged 260,000 per month—well above the 160,000 monthly average seen throughout the 2010–13 recovery.

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