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What the Continued Global Uncertainty Means for You

2021-01-19T15:49:34-05:00January 19, 2021|

By Hites Ahir, Nicholas Bloom, and Davide Furceri

عربيEspañol中文Français, 日本語, PortuguêsРусский 

Global uncertainty reached unprecedented levels at the beginning of the COVID-19 outbreak and remains elevated. The World Uncertainty Index—a quarterly measure of global economic and policy uncertainty covering 143 countries—shows that although uncertainty has come down by about 60 percent from the peak observed at the onset of the COVID-19 pandemic in the first quarter of 2020, it remains about 50 percent above its historical average during the 1996–2010 period.

Uncertainty in systemic economies matters for uncertainty around the world.

What drives global uncertainty?

Economic growth in key systemic economies, like those of the United States and European Union, is a key driver of economic activity in the rest of the world. Is this also true when it comes to global uncertainty? For example, given the higher interconnectedness across countries, should we expect that uncertainty from the U.S. election, Brexit, or China-U.S. trade tensions spill over and affect uncertainty in other countries?

To answer this question, we construct an index that measures the extent of “uncertainty spillovers” from key systemic economies—the Group of 7 (G7) countries plus China—to the rest of the world. In particular, we identify uncertainty spillovers from systemic economies by text mining the Economist Intelligence Unit country reports, covering 143 countries from the first quarter of 1996 to the fourth quarter of 2020.

Uncertainty spillovers from each of the systemic economies are measured by the frequency that the word “uncertainty” is mentioned in the reports in proximity to a word related to the respective systemic-economy country. Specifically, for each country and quarter, we search the country reports for the words “uncertain,” “uncertainty,” and “uncertainties” appearing near words related to each country. The country-specific words include country’s name, name of presidents, name of the central bank, name of central bank governors, and selected country’s major events (such as Brexit).

To make the measure comparable across countries, we scale the raw counts by the total number of words in each report. An increase in the index indicates that uncertainty is rising, and vice versa.

Our results reveal two key facts:

First: Yes, uncertainty in systemic economies matters for uncertainty around the world.

Second: Only the United States and the United Kingdom have significant uncertainty spillover effects, while the other systemic economies play a little role, on average.

Starting with the United States, the chart below displays the global (excluding the United States) average of the ratio of uncertainty related to the United States to overall uncertainty. It shows that uncertainty related to the United States has been a key source of uncertainty around the world since the past few decades

For instance, during the 2001–2003 period, U.S.-related uncertainty contributed to about 8 percent of the uncertainty in other countries—about 23 percent of the increase in global uncertainty from the historical mean. n the last 4 years, U.S.-related uncertainty has contributed to about 13 percent of uncertainty in other countries—with peaks of about 30 percent—and approximately 20 percent of the increase in global uncertainty from historical mean.

Uncertainty related to the U.K.-EU Brexit negotiations has also had significant global spillovers in the last 4 years, with a peak of more than 30 percent and contributing to about 11 percent in the rise in global uncertainty during this period.

Finally, the ratio of uncertainty related to the other systemic countries to overall uncertainty shows Canada, China, France, Germany, Italy, and Japan combined have little uncertainty spillover effects on the rest of the world. An exception is China in the recent years, but most of the China-related uncertainty is due to trade tensions with the United States. That said, while other systemic economies have limited global uncertainty spillovers, they have important regional uncertainty effects—such as for example, Germany for the other European economies and China and Japan for several Asian economies.

Top 10 Charts of the Week for 2020

2020-12-21T10:00:24-05:00December 21, 2020|

2020 will soon be over, and with it an incredibly trying year. The editors at IMFBlog wish you good health and peace over the holidays ahead, and into the new year.

In case you missed some of the compelling facts and figures in our Charts of the Week series this year, we have pulled together your top reads.

Here are the top ten charts of the week for 2020, based on your readership.

1. Global Uncertainty Related to Coronavirus at Record High

2. Unemployment in Today’s Recession Compared to the Global Financial Crisis

3. How the Rich Get Richer

4. Tourism Trauma and COVID-19

5. Low Internet Access Driving Inequality

6. The Crisis is Not Over, Keep Spending (Wisely)

7. Aging Economies May Benefit Less from Fiscal Stimulus

8. Data Disruption: The Impact of COVID-19 on Inflation Measurement

9. Waste Woes in the World

10. Public Opinion on Automation


What is Really New in Fintech

2020-12-17T10:13:14-05:00December 17, 2020|

By Arnoud Boot, Peter Hoffmann, Luc Laeven, Lev Ratnovski

The financial industry is undergoing rapid technological change. Traditional banks face competition from online start-ups with no physical branches. Social media and other digital platforms are expanding into payments and credit. The increase in demand for digital services triggered by COVID-19 is turbo-charging this transformation. The confluence we are witnessing is driving fintech innovation and raises important questions. What are the transformative aspects of recent financial innovation that can uproot finance as we know it? Which new policy challenges will the transformation of finance bring?

Fintech’s potential to reach out to over a billion unbanked people around the world, and the changes in the financial system structure that this can induce, can be revolutionary.

Recent IMF and ECB staff research distinguishes two areas of financial innovation. One is information: new tools to collect and analyse data on customers, for example for determining creditworthiness. Another is communication: new approaches to customer relationships and the distribution of financial products. We argue that each dimension contains some transformative components.

New types of information

The most transformative information innovation is the increase in use of new types of data coming from the digital footprint of customers’ various online activities—mainly for credit-worthiness analysis.

Credit scoring using so-called hard information (income, employment time, assets and debts) is nothing new. Typically, the more data is available, the more accurate is the assessment. But this method has two problems. First, hard information tends to be “procyclical”: it boosts credit expansion in good times but exacerbates contraction during downturns.

The second and most complex problem is that certain kinds of people, like new entrepreneurs, innovators and many informal workers might not have enough hard data available. Even a well-paid expatriate moving to the United States can be caught in the conundrum of not getting a credit card for lack of credit record, and not having a credit record for lack of credit cards.

Fintech resolves the dilemma by tapping various nonfinancial data: the type of browser and hardware used to access the internet, the history of online searches and purchases. Recent research documents that, once powered by artificial intelligence and machine learning, these alternative data sources are often superior than traditional credit assessment methods, and can advance financial inclusion, by, for example, enabling more credit to informal workers and households and firms in rural areas.

New communication channels

Communication innovation is driven by the variety of digital platforms in social media, mobile communication, and online shopping that have penetrated much of consumers’ everyday lives, thus increasing their digital footprint and the available data. Platforms like Amazon, Facebook or Alibaba incorporate more and more financial services into their ecosystems, enabling the rise of new specialized providers that compete with banks in payments, asset management, and financial information provision.

Technology again boosts an existing trend. The shift from in-person bank branch visits to remote, online communication generally improves customer convenience and makes financial intermediation more cost-efficient. It also boosts geographic competition among banks, which can now service more distant customers.

The effects of digital transformation are powerful for the financial sector, already the industry most heavily reliant on computers. That is compounded by the doubling in use of online banking having in the past two decades in the European Union’s 15 largest economies. And with usage at 50 percent on average, it still has significant room to grow.


Policy challenges

That growth potential ensures that digital innovation in information and communication is bound to deepen even further and give rise to new priorities in several policy areas. Prudential regulation faces perhaps the most substantial challenges. Regulators need to assess the operational risks of new lending technologies and business models facing their first real-life stress test during the COVID-19 downturn.

Other risks also loom large: more cybersecurity risks (financial institutions and customers using more online services creates potential new opportunities for criminals), and regulatory arbitrage (tailoring business models to reduce regulatory oversight). To address all these challenges, regulatory agencies need to ensure that their expertise matches that of the industry—something historically difficult that may become even harder as more talent enters the financial technology sphere and the pace of innovation accelerates.

The environment for monetary policy will change too. The procyclical bias of hard information (exacerbating up- and downswings) might require central bankers to be more “countercyclical,” (i.e., potentially overcompensate with stimulating or cooling measures stronger than actual economic developments would warrant). New monetary policy transmission channels will need to be fully understood. And, as new players make banks less relevant for the financial system, central banks may need to adjust their monetary policy implementation toolbox, potentially allowing nonbanks access to liquidity lines and incorporating them in their operations.

Other critical areas include competition policy, to address the monopolistic tendencies of large digital platforms, related to network effects and the natural tendency to converge to a few large platforms; and data policies to ensure consumer privacy and efficient and safe collection, processing, and exchange of data.

Overall, while much of the technological progress in finance is evolutionary, its pace is accelerating fast. Fintech’s potential to reach out to over a billion unbanked people around the world, and the changes in the financial system structure that this can induce, can be revolutionary.

Governments should follow and carefully support the technological transition in finance. It is important to adjust policies accordingly and stay ahead of the curve.


Arnoud Boot is professor of finance at the University of Amsterdam, Peter Hoffmann and Luc Laeven are economists with the European Central Bank, and Lev Ratnovski is an economist with the IMF (currently on leave) seconded to the European Central Bank. The blog is based on an IMF Working Paper, “Financial Intermediation and Technology: What’s Old, What’s New?” published in August 2020.

Bridging the Digital Divide to Scale Up the COVID-19 Recovery

2020-11-05T16:03:25-05:00November 5, 2020|

By Patrick Njoroge and Ceyla Pazarbasioglu

عربي, 中文, EspañolFrançais, 日本語, PortuguêsРусский 

Digitalization has in the past few years enabled developing countries in particular to leapfrog on financial inclusion. Countries like Kenya, Ghana, Rwanda and Tanzania have made great advances in connecting their citizens to financial systems by leveraging on mobile phone technology. (more…)

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