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When Should Public Debt Be Reduced?

July 2, 2015 Comments off

When Should Public Debt Be Reduced?
Source: International Monetary Fund

What considerations should guide public debt policy going forward? Should debt be reduced to achieve normative anchors (such as 60 percent of GDP), should it be increased further to finance a big public investment push, or should the existing debt be serviced forever? We argue that, for countries with ample fiscal space (little risk of encountering a fiscal crisis), raising distortive taxes merely to bring the debt down is a treatment cure that is worse than the disease. High public debt of course is costly, but it is a sunk cost only made worse by efforts to pay down the debt through distortionary taxation. Living with the debt is the welfare-maximizing policy. In decisions vis-à-vis the big push for public investment, golden-rule considerations remain salient, with due account taken of the additional servicing costs (and associated distortive taxation) from the resulting buildup of public debt.

When Should Public Debt Be Reduced?

June 22, 2015 Comments off

When Should Public Debt Be Reduced? (PDF)
Source: International Monetary Fund

Financial bailouts, stimulus spending, and lower revenues during the Great Recession have resulted in some of the highest public debt ratios seen in advanced economies in the past 40 years. Recent debates have centered on the pace at which to pay down this debt, with few questions being asked about the desirable level of public debt to which the economy should converge following a debt shock. While some countries face debt sustainability constraints that leave them little choice, others are in the more comfortable position of being able to fund themselves at reasonable—even exceptionally low—interest rates. For these countries, there is a very real question of whether to live with high debt while allowing the debt ratio to decline organically through growth, or to pay it down deliberately to reduce the burden of the debt.

This paper considers optimal public debt and investment policy in the aftermath of the global financial crisis. It abstracts from rollover risks faced by countries that are near their debt limits, and also from shorter-run cyclical considerations. It is not that these considerations are unimportant— for they surely are at present in a number of countries. But they are not the dominant factors for countries that are near full employment and enjoy considerable fiscal space (even in some cases despite relatively high levels of public debt, as argued in our earlier IMF Staff Position Note on this topic, Ostry and others [2010]), a set of countries that are also in need of policy advice.

Islamic Finance, Consumer Protection, and Financial Stability

May 27, 2015 Comments off

Islamic Finance, Consumer Protection, and Financial Stability
Source: International Monetary Fund

Consumer protection and financial literacy are essential pillars of a well functioning and stable financial system. As the global financial crisis demonstrated, inadequate attention to consumer protection and financial literacy can lead to financial instability. Though Shari’ah principles provide a strong foundation for consumer protection, the principles alone cannot provide adequate protection because not all providers are guided by ethical precepts and the practices have deviated from the principles. To safeguard the stability of the Islamic finance industry, consumer protection frameworks that cater to the specifics of Islamic financial products should be an integral part of regulatory frameworks.

The Liquidation of Government Debt

March 30, 2015 Comments off

The Liquidation of Government Debt
Source: International Monetary Fund

High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or belowmarket real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial repression is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were negative ½ of the time during 1945–1980. Average annual interest expense savings for a 12—country sample range from about 1 to 5 percent of GDP for the full 1945–1980 period. We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.

Can Islamic Banking Increase Financial Inclusion?

March 23, 2015 Comments off

Can Islamic Banking Increase Financial Inclusion?
Source: International Monetary Fund

The paper analyses existing country-level information on the relationship between the development of Islamic banking and financial inclusion. In Muslim countries—members of the Organization for Islamic Cooperation (OIC)—various indicators of financial inclusion tend to be lower, and the share of excluded individuals citing religious reasons for not using bank accounts is noticeably greater than in other countries; Islamic banking would therefore seem to be an effective avenue for financial inclusion. We found, however, that although physical access to financial services has grown more rapidly in the OIC countries, the use of these services has not increased as quickly. Moreover, regression analyis shows evidence of a positive link to credit to households and to firms for financing investment, but this empirical link remains tentative and relatively weak. The paper explores reasons that this might be the case and suggests several recommendations to enhance the ability of Islamic banking to promote financial inclusion.

Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws

February 17, 2015 Comments off

Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws
Source: International Monetary Fund

Laws governing the foreclosure process can have direct consequences on the costs of foreclosure and could therefore affect lending decisions. We exploit the heterogeneity in the judicial requirements across U.S. states to examine their impact on banks’ lending decisions in a sample of urban areas straddling state borders. A key feature of our study is the way it exploits an exogenous cutoff in loan eligibility to GSE guarantees which shift the burden of foreclosure costs onto the GSEs. We find that judicial requirements reduce the supply of credit only for jumbo loans that are ineligible for GSE guarantees. These laws do not affect, however, the relative demand of jumbo loans. Our findings, which also hold using novel nonbinary measures of judicial requirements, illustrate the consequences of foreclosure laws on the supply of mortgage credit. They also shed light on a significant indirect cross-subsidy by the GSEs to borrower-friendly states that has been overlooked thus far.

IMF — World Economic Outlook Update — January 2015

January 22, 2015 Comments off

World Economic Outlook Update — January 2015
Source: International Monetary Fund

+ Global growth will receive a boost from lower oil prices, which reflect to an important extent higher supply. But this boost is projected to be more than offset by negative factors, including investment weakness as adjustment to diminished expectations about medium-term growth continues in many advanced and emerging market economies.

+ Global growth in 2015–16 is projected at 3.5 and 3.7 percent, downward revisions of 0.3 percent relative to the October 2014 World Economic Outlook (WEO). The revisions reflect a reassessment of prospects in China, Russia, the euro area, and Japan as well as weaker activity in some major oil exporters because of the sharp drop in oil prices. The United States is the only major economy for which growth projections have been raised.

+ The distribution of risks to global growth is more balanced than in October. The main upside risk is a greater boost from lower oil prices, although there is uncertainty about the persistence of the oil supply shock. Downside risks relate to shifts in sentiment and volatility in global financial markets, especially in emerging market economies, where lower oil prices have introduced external and balance sheet vulnerabilities in oil exporters. Stagnation and low inflation are still concerns in the euro area and in Japan.

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