How Policy Makers Can Better Predict a Downturn – and Prepare

By Claudio Raddatz and Jay Surti

October 3, 2017

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

A trading floor in Singapore. Financial conditions provide valuable clues to the economic outlook and can improve the accuracy of forecasts (photo: Caro/Oberhaeuser/Newscom).

The global financial crisis showed that periods of robust growth and seeming calm in financial markets can be followed by a sudden surge in market volatility and an unexpected economic downdraft. That’s why it is so important for policy makers to keep a close watch on so-called financial conditions. These can include everything from bond yields and oil prices to foreign exchange rates and levels of domestic debt. Continue reading “How Policy Makers Can Better Predict a Downturn – and Prepare” »

Rising Household Debt: What It Means for Growth and Stability

By Nico Valckx

October 3, 2017

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

Household debt, including mortgage debt, has been on the rise since the global financial crisis (photo: Louoates/iStock).

Debt greases the wheels of the economy. It allows individuals to make big investments today–like buying a house or going to college – by pledging some of their future earnings.

That’s all fine in theory. But as the global financial crisis showed, rapid growth in household debt – especially mortgages – can be dangerous. Continue reading “Rising Household Debt: What It Means for Growth and Stability” »

The Promise of Islamic Finance: Further Inclusion with Stability

By Mohamed Norat, Marco Pinon and Zeine Zeidane

(Versions in عربي)

Since the global financial crisis, policymakers have sought to press the “reset” button to strengthen financial intermediation that is performed by conventional banks and non-bank financial institutions. The aim has been to address the fault lines that helped trigger one of the most devastating financial crises in a century, and to enable a more inclusive, stable financial system that promotes stability as well as economic development and growth.

Islamic finance offers several features that are consistent with these objectives. Islamic finance refers to financial services that conform with Islamic jurisprudence, or Shari’ah, which bans interest, speculation, gambling and short-sales; requires fair treatment; and institutes sanctity of contracts. And these principles hold the promise of supporting financial stability, since a key tenet of Islamic finance is that lenders should share in both the risks and rewards of the projects and loans they finance. 

Continue reading “The Promise of Islamic Finance: Further Inclusion with Stability” »

Canada’s Financial Sector: How to Enhance its Resilience

By Hamid Faruqee and Andrea Pescatori

(Version in Français)

In the aftermath of the 2008 financial crisis, Canada’s financial system held up remarkably well—making it the envy of its Group of Seven peers. This relative resilience was particularly impressive considering its most important trading and financial partner, the United States, was the epicenter of the crisis.

Part of Canada’s success story lies in the fact that its banking system is dominated by a handful of large players who are well capitalized and have safe, conservative, and profitable business models concentrated in mortgage lending—much of it covered by mortgage insurance and backstopped by the federal government. Notwithstanding such an enviable record and sound financial system, we need to keep an eye on certain financial risks.

Continue reading “Canada’s Financial Sector: How to Enhance its Resilience” »

Where Danger Lurks

blanchardBy iMFDirect

Lurking conjures up images of spies, flashers and other dodgy types.  The IMF’s chief economist Olivier Blanchard takes readers into the dark corners of the financial crisis in his latest article ‘Where Danger Lurks’  in our recent issue of Finance & Development Magazine, and looks at small shocks, sudden stops and liquidity.

Continue reading “Where Danger Lurks” »

Monetary Policy Will Never Be the Same

WEOBy Olivier Blanchard

(Version in Español)

Two weeks ago, the IMF organized a major research conference, in honor of Stanley Fischer, on lessons from the crisis. Here is my take.   I shall focus on what I see as the lessons for monetary policy, but before I do this, let me mention two other important conclusions.

One, having your macro house in order pays off when there is an (external) crisis.  In contrast to previous episodes, wise fiscal policy before this crisis gave emerging market countries the room to pursue countercyclical fiscal policies during the crisis, and this made a substantial difference.

Second, after a financial crisis, it is essential to rapidly clean up and recapitalize the banks. This did not happen in Japan in the 1990s, and was costly.  But it did happen in the US in this crisis, and it helped the recovery.

Now let me now turn to monetary policy, and touch on three issues: the implications of the liquidity trap, the provision of liquidity, and the management of capital flows.

Continue reading “Monetary Policy Will Never Be the Same” »

Seeing Our Way Through The Crisis: Why We Need Fiscal Transparency

Without good fiscal information, governments can’t understand the fiscal risks they face or make good budget decisions. Fiscal transparency—the public availability of timely, reliable, and relevant data on the past, present, and future state of the public finances—is thus to the foundation of effective fiscal management.

Promoting Multilateral Solutions for a Globalized World

The new issue of Finance & Development magazine looks at different aspects of interconnectedness. Kishore Mahbubani, dean of the National University of Singapore’s Lee Kuan Yew School of Public Policy, argues that what he terms the global village increasingly requires global solutions to big emerging problems such as climate change. Kemal Derviş, former head of the United Nations Development Programme who is now a vice president at the Brookings Institution, looks at three fundamental shifts in the global economy that are leading to major adjustments in the balance between east and west.

How to Exit the Danger Zone: IMF Update on Global Financial Stability

Many of the root causes of the euro area crisis still need to be addressed before the system is stabilized and returns to health. Until this is done, global financial stability is likely to remain well within the “danger zone,” where a misstep or failure to address underlying tensions could precipitate a global crisis with grave economic and financial consequences.

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