The Current Economic Sweet Spot Is Not the “New Normal”

By Maurice Obstfeld

January 22, 2018

Versions in عربي (Arabic),  中文 (Chinese),  Español (Spanish), Français (French), 日本語 (Japanese),  Русский (Russian)

Global growth continues to pick up and is broad based. But no matter how tempting it is to sit back and enjoy the sunshine, policy can and should move to strengthen the recovery (photo: Mumbai, India, Ingram Publishing/Newscom).

As the year 2018 begins, the world economy is gathering speed. The new World Economic Outlook Update revises our forecast for the world economy’s growth in both 2018 and 2019 to 3.9 percent. For both years, that is 0.2 percentage points higher than last October’s forecast, and 0.2 percentage points higher than our current estimate of last year’s global growth. Continue reading “The Current Economic Sweet Spot Is Not the “New Normal”” »

Fed Tightening May Squeeze Portfolio Flows to Emerging Markets

By Robin Koepke

December 14, 2017

Versions in  中文 (Chinese),  Español (Spanish),  Français (French), 日本語 (Japanese),  Русский (Russian)

Derivatives traders in Singapore: Tighter Federal Reserve monetary policy is likely to reduce overseas purchases of emerging market stocks and bonds (photo: Caro/Rupert Oberhaeuser/Newscom)

A key question facing global investors today is what impact the US Federal Reserve’s monetary policy normalization process will have on capital flows to emerging markets. The IMF’s new model estimates show that normalization—raising the policy interest rate and shrinking the balance sheet—will likely reduce portfolio inflows by about $70 billion over the next two years, which compares with average annual inflows of $240 billion since 2010. Continue reading “Fed Tightening May Squeeze Portfolio Flows to Emerging Markets” »

Roads or Schools: A Critical Tradeoff

By Manoj Atolia, Bin Grace Li, Ricardo Marto, and Giovanni Melina

November 9, 2017 

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Low-income countries tend to spend less on schools than on roads as a share of GDP (photo: iStock by Getty Images).

Roads or schools? It’s a question akin to the “guns or butter” choice that governments around the world confronted in the 20th century: How to spend a nation’s finite resources to produce the maximum benefit for its people.

In our recent IMF Working Paper, we find that low-income countries tend to spend less on schools than on roads as a share of GDP—even though investment in education may be a more pressing need in their societies. 

Continue reading “Roads or Schools: A Critical Tradeoff” »

Understanding and Managing Financial Interdependence

By Maurice Obstfeld

November 8, 2017

(photo: AlexLMX and David Hunt/iStock)

The 18th Annual Jacques Polak Annual Research Conference last week opened with Managing Director Christine Lagarde noting the ebb and flow of capital movements into emerging market and developing economies since the turn of the millennium. She asked three questions at the heart of the discussion, and to which speakers returned consistently during the conference: Continue reading “Understanding and Managing Financial Interdependence” »

Understanding the Global Financial Cycle

By Maurice Obstfeld and Mahvash S. Qureshi

October 27, 2017

The boom and bust in cross-border capital flows around the global financial crisis, and in its aftermath, have rekindled debates on the existence and implications of a “global financial cycle.”

The traditional open-economy (“Mundell-Fleming”) model postulates that countries face a “trilemma”: a trade-off among the objectives of exchange rate stability, free capital mobility, and independent monetary policy. If a country chooses exchange rate stability and free capital mobility, it must give up monetary policy autonomy. Conversely, an independent monetary policy in the presence of free capital flows is possible through exchange rate flexibility. Continue reading “Understanding the Global Financial Cycle” »

Financial Stability Improves, But Rising Vulnerabilities Could Put Growth at Risk

By Tobias Adrian

October 11, 2017

Versions in Versions in عربي (Arabic), 中文 (Chinese), Español (Spanish), Français (French). 日本語 (Japanese), Русский (Russian)

The headquarters of the European Central Bank in Frankfurt, Germany: To avoid causing market turbulence, central banks will have to clearly communicate their plans to gradually unwind crisis-era policies (photo: Caro/Sven Hoffman/Newscom).

It seems like a paradox. The world’s financial system is getting stronger, thanks to healthy economic growth, buoyant markets, and low interest rates. Yet despite these favorable conditions, dangers in the form of rising financial vulnerabilities are starting to loom. That is why policymakers should act now to keep those vulnerabilities in check. Continue reading “Financial Stability Improves, But Rising Vulnerabilities Could Put Growth at Risk” »

Chart of the Week: High Hurdles for Trade in Services

By IMFBlog

September 25, 2017

A shop window in Stockholm, Sweden: 62 % of jobs in the country are in the services sector (photo: Bob Strong/Reuters/Newscom).

The service sector accounts for some two-thirds of economic activity, and roughly the same share of jobs around the world. And yet the barriers to trade in services—from banking to online consultations with doctors or engineers—remain high.

Continue reading “Chart of the Week: High Hurdles for Trade in Services” »

Drifting Apart: Income Convergence in the Euro Area

A souvenir shop in Lisbon, Portugal: Income convergence in the euro area has slowed (Photo: Rafael Marchante/REUTERS/Newscom)

By Jeffrey Franks and Hanni Schölermann

September 13, 2017

Versions in Español (Spanish), 語 (Japanese)

The experience of recent decades has challenged the prediction that the single currency would help differences in income levels across euro area countries narrow over time. This income convergence among the founding countries of the euro has not happened, prompting a need for further economic reforms. While newer members of the euro have converged, even this trend has stalled since the crisis.

Continue reading “Drifting Apart: Income Convergence in the Euro Area” »

All Hands on Deck: Confronting the Challenges of Capital Flows

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

August 2, 2017

Versions in  Español (Spanish)

Exchange rates board, Australian Securities Exchange: Emerging economies have several tools to manage capital flows. The most common are foreign exchange intervention and monetary policy (photo: wx-bradwang/iStock by Getty Images)

The global financial crisis and its aftermath saw boom-bust cycles in capital flows of unprecedented magnitude. Traditionally, emerging market economies were counselled not to impede capital flows. In recent years, however, there has been growing recognition that emerging market economies may benefit from more proactive management to avoid crisis when flows eventually recede. But do they adopt such a proactive approach in practice?

Continue reading “All Hands on Deck: Confronting the Challenges of Capital Flows” »

Latest Outlook for The Americas: Back on Cruise Control, But Stuck in Low Gear

By Alejandro Werner

July 25, 2017

Versions in Español (Spanish), Português (Portuguese)

Shopping mall in Viña del Mar, Chile: Latin America is expected to recover gradually as most economies continue to face weak domestic demand (photo: Rodrigo Garrido/Newscom)

After disappointing growth over the past few years, economic activity in Latin America remains on track to recover gradually in 2017–18 as recessions in a few countries—notably Argentina and Brazil—are coming to an end. Our latest projections show the region growing by 1 percent in 2017 and 1.9 percent in 2018.

But amid low confidence, domestic demand continues to remain weak across most economies, and is expected to only recover slowly as actual output catches up to potential and internal sources of growth build strength, based on a decline in political and policy uncertainty across some major economies. Some countries in the region will need clear strategies to adjust further following a permanent loss in commodity revenues. Continue reading “Latest Outlook for The Americas: Back on Cruise Control, But Stuck in Low Gear” »

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