Multi-Track Monetary Policies in Advanced Economies: What This Means for Asia

By James Daniel and Rachel van Elkan

Since mid-2014, diversity and divergence—applying to countries’ economic situations, policies and performance—have dominated global economic discussions. Differing economic performance in major advanced countries has led to divergent monetary policies.

Both the Bank of Japan and the European Central Bank have started significant expansions of their balance sheets, while the U.S. Federal Reserve has ended its bond-buying program and is expected to start raising rates. This has had many effects, in particular, contributing to a sharp depreciation of the Yen and the Euro against the U.S. dollar (see chart 1).

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Battling Global Unemployment: Too Soon to Declare Victory

Prakash LounganiBy Prakash Loungani

(Version in Français and Español)

Seven years after the onset of the Great Recession, the global unemployment rate has returned to its pre-crisis level: the jobless rate fell to 5.6% in 2014; essentially the same as in 2007, the year before the recession (chart 1, left panel).

Global Unemployment 1

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The Evolution of Monetary Policy: More Art and Less Science

By Giovanni Dell’Ariccia and Karl Habermeier

(Versions in Español)

The global financial crisis shook monetary policy in advanced economies out of the almost complacent routine into which it had settled since Paul Volcker’s Fed beat inflation in the United States in the early 1980s.

Simply keep inflation low and stable, target a short-term interest rate, and regulate and supervise financial institutions, the mantra went, and all will be well.

Of course many scholars and policymakers, especially in emerging markets, were skeptical of this simple creed. But they did not make much headway against a doctrine seemingly well-buttressed by sophisticated theoretical models, voluminous empirical research, and over 20 years of “Great Moderation” —low inflation and output volatility. All of that has changed since the crisis, and ideas that were once marginal have now moved to center stage.

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Emerging Asia: At Risk of the “Middle-Income Trap”?

ASinghBy Anoop Singh

(Versions in 中文 and 日本語)

Emerging economies in Asia have weathered the global financial crisis relatively unscathed and appear to be on track for continued strong growth this year and the next. Perhaps because the region has been doing rather well, policymakers’ concerns have increasingly shifted towards medium-term risks: could growth and fast convergence to living standards in advanced economies—come to an end?

In fact, while the economic performance of emerging economies in Asia remains undoubtedly strong in international comparison, it has already shown signs of gradual weakening.

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Tharman Sees “Greater Global Policy Resolve”

The world is now in a much better situation than six months ago when it comes to policy solutions, according to Tharman Shanmugaratnam, Singapore's Deputy Prime Minister and Minister for Finance , who is Chair of the IMF's policy-setting committee, the IMFC, speaking about the outcome of the IMF-World Bank annual meetings in Tokyo.

Imagining If Key Foreign Banks Start Reducing Their Exposure in Asia

Going forward, while the space for a macroeconomic policy response is smaller than it was entering the global financial crisis, Asia’s policymakers still have ample room to react appropriately to a sharp deleveraging of foreign banks arising from a euro area shock. In addition, capital adequacy ratios, which exceed regulatory norms in most economies, and low nonperforming loan ratios, combined with room to offer liquidity support, suggest that relatively healthy local banking systems should also provide a buffer, as they did in the wake of the global financial crisis.

Closer, Ever Closer

Over the past two decades—in line with the region’s growing role in the global economy—Asia’s equity markets have become increasingly sensitive to global financial developments. More specifically, we have discovered that equity returns in Asia generally now move in tandem with those in systemic economies. (By systemic economies, we are talking here about those countries—such as the United States and the United Kingdom which are home to major, global, financial centers such as Wall Street and the City of London.)

The Puzzle of Asia’s Rapid Rebound

Now here’s the puzzle: how is it that Asia has rebounded sooner and more strongly than the rest of the globe from the economic slump when the region is so heavily dependent on exports for its growth? This, and the future prospects for the region, are two of the key issues we analyzed in the latest Regional Economic Outlook (REO) for Asia and the Pacific, recently launched in Seoul and Tokyo.

By | November 2nd, 2009|Asia, Economic Crisis, Fiscal Stimulus, growth|
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