In the midst of the Great Depression, the American economist Irving Fisher warned of the dangers of excessive debt and the deflationary pressures that follow on its tail. He saw debt and deflation as the big, bad actors. Now, their close relatives—too high debt and too low inflation—are still in play, at least for advanced economies.
Small businesses could be the lifeblood of Europe’s economy, but their size and high debt are two of the factors holding back the investment recovery in the euro area. The solution partly lies in policies to help firms grow and reduce debt.
Our new study, part of the IMF’s annual economic health check of the euro area, takes a novel bottom-up look at the problem. We analyze the drivers of investment using a large dataset of over six million observations in eight euro area countries, from 2003 to 2013: Austria, Belgium, Germany, France, Finland, Italy, Portugal, and Spain. Continue reading “Sluggish Business Investment in the Euro Area: The Roles of Small and Medium Enterprises and Debt” »
Many low-income developing countries have joined the group of Eurobond issuers across the globe— in sub-Saharan Africa (for example, Senegal, Zambia, and Ghana), Asia (for example, Mongolia) and elsewhere, raising over US$21 billion cumulatively over the past decade. Tapping these markets provides a new source of funds, but also exposes borrowers to shifts in investor sentiment and rising global interest rates.
How quickly should the United States tighten monetary policy and exit from quantitative easing? Is the neutral real interest rate lower than before the crisis? Should we raise inflation targets? What can we learn from the unconventional policies that emerging markets adopted during the crisis? Are we entering an environment of global deflation? And if so, can the existing central bank toolkit stave off that threat?
Seven years after the crisis, the effects of unconventional monetary policies continue to be a matter of debate. There is little consensus not only about the effectiveness of these policies in promoting aggregate demand, but also about possible unintended side effects on financial stability.
by Vitor Gaspar
The world economy is experiencing important transitions and associated uncertainties.
- Commodity prices have fallen sharply, with adverse consequences for exporting countries.
- China’s rebalancing and the prospect of U.S. interest rate increases are having important and costly spillover effects on other economies.
- And these and other factors are posing important fiscal challenges, especially for emerging markets.
By José Viñals
Today global financial stability is not yet assured and downside risks prevail. Our recommendation is for an urgent upgrade in policies, to avoid downside risks and to achieve our upside scenario of “successful normalization” of monetary and financial conditions. This will secure financial stability and strengthen the economic recovery.
All European Union members, except Denmark and the United Kingdom, are expected under EU treaties to eventually adopt the euro. Six Central and Eastern EU members – Bulgaria, Croatia, Czech Republic, Hungary, Poland and Romania – are yet to do so.
In the meantime, these countries have a decision to make: Should they opt in to the Banking Union before adopting the euro? Such a move may offer greater insurance against shocks, but at a certain cost to policy flexibility. In a recent study, we explore some of the trade-offs that countries need to weigh.
In the wake of the global financial crisis, monetary and fiscal policies were used aggressively to counteract the effects of the crisis on economic activity. Policymakers look at a number of indicators to guide them in assessing an economy’s level of activity relative to its productive capacity. But trying to figure out the position of the economy in real time is often quite challenging, with consequences for setting policy.
In the case of Brazil in 2011, for example, policymakers estimated in real time that the economy was at a level of output consistent with its productive capacity. Over time, however, the assessment of the cyclical position of the Brazilian economy changed drastically. It had not just been at full capacity, but was overheating. The economy was actually facing inflationary pressures, requiring policy tightening to bring it back to the central bank’s target.
By David Lipton
Why have businesses in advanced economies not been investing more in machinery, equipment and plants? Business investment is the largest component of private investment, and its weakness has puzzled many of us.
Some believe that the key to more business investment is less uncertainty about fiscal policy, regulation, and structural reforms. Some believe that it is providing better financing, including for small and medium-sized enterprises (SMEs).
All eyes are on Greece, as the parties involved continue to strive for a lasting deal, spurring vigorous debate and some sharp criticisms, including of the IMF.
In this context, I thought some reflections on the main critiques could help clarify some key points of contention as well as shine a light on a possible way forward.
The main critiques, as I see them, fall under the following four categories:
- The 2010 program only served to raise debt and demanded excessive fiscal adjustment.
- The financing to Greece was used to repay foreign banks.
- Growth-killing structural reforms, together with fiscal austerity, have led to an economic depression.
- Creditors have learned nothing and keep repeating the same mistakes.