Price stability has long been enshrined as the main objective of monetary policy, and, with that, gone are the days of high and volatile inflation. Monetary stability seems almost a given today. However, the global financial crisis revealed that, by focusing on price stability, monetary policy frameworks might not always sound the alarm when financial stability comes under threat. In his latest blog, José Viñals reflects on the monetary policy lessons that emerged from the global financial crisis and the need for a "happy marriage" between the goals of price stability and financial stability.
Asia’s leadership of the global recovery is continuing unabated. The IMF now expects GDP in Asia to grow by about 7¾ percent in 2010 (up about ½ a percentage point from what was envisaged in April), before easing to about 6¾ percent in 2011. And, even though the downside risks to growth have intensified, the region is well equipped to handle them.
The International Monetary Fund remains cautiously optimistic about the pace of recovery, but there are clear dangers and policy challenges ahead. IMF chief economist Olivier Blanchard says how Europe deals with fiscal and financial problems, how advanced countries proceed with fiscal consolidation, and how emerging countries rebalance their economies, will determine the outcome.
We offer ten commandments so that fiscal strategies can be designed to make them consistent with both short-term and long-term growth requirements. Put simply, what advanced countries need is clarity of intent, an appropriate calibration of fiscal targets, and adequate structural reforms. With a little help from monetary policy, and from their (emerging market) friends.
The new issue of the IMF’s Finance & Development magazine explores how the region is moving into a leadership role in the world economy. Anoop Singh, Director of the IMF’s Asia and Pacific Department, says that, based on expected trends, within five years Asia’s economy will be about 50 percent larger than it is today and be comparable in size to the economies of the United States and Europe.
As the financial crisis taught us, supervision is incredibly important. Countries with the same set of rules had very different experiences during the crisis. Why? There are clearly many reasons but one of them is “better supervision.” After all, rules are only as good as their implementation. In some countries, the financial supervisor became the unsung hero of the crisis. One might say “It’s hip to be square!”
With Asia recovering ahead of and faster than advanced economies, policy conditions in the region will need to start normalizing sooner than in several other parts of the world. But the fragility of the global recovery means that the withdrawal of stimulus will have to be cautious and gradual.
We find ourselves at an important new stage of the crisis. A global depression has been averted. The world economy is recovering, and recovering better than we had previously thought likely. This is certainly welcome news. But new---and no less formidable—challenges have presented themselves.
Global financial risks remain elevated: financial stability has not been secured, as the recovery is still fragile, and the repair of consumer and financial balance sheets is still ongoing. Furthermore, there are concerns over rising sovereign risks related to the buildup of public debt that need to be carefully monitored and addressed.
The varied experience of emerging market economies during the global financial crisis underscores an important lesson: good policies beget good outcomes. Investing during good times to develop a sound policy framework that delivers stronger fundamentals and lower vulnerabilities yields large dividends during crises. In the current crisis, low-vulnerability countries had lower output declines, more space to undertake countercyclical policies, and quicker recoveries.