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Identifying Speculative Bubbles: A Two-Pillar Surveillance Framework

December 10, 2014 Comments off

Identifying Speculative Bubbles: A Two-Pillar Surveillance Framework
Source: International Monetary Fund

In the aftermath of the global financial crisis, the issue of how best to identify speculative asset bubbles (in real-time) remains in flux. This owes to the difficulty of disentangling irrational investor exuberance from the rational response to lower risk based on price behavior alone. In response, I introduce a two-pillar (price and quantity) approach for financial market surveillance. The intuition is straightforward: while asset pricing models comprise a valuable component of the surveillance toolkit, risk taking behavior, and financial vulnerabilities more generally, can also be reflected in subtler, non-price terms. The framework appears to capture stylized facts of asset booms and busts—some of the largest in history have been associated with below average risk premia (captured by the ‘pricing pillar’) and unusually elevated patterns of issuance, trading volumes, fund flows, and survey-based return projections (reflected in the ‘quantities pillar’). Based on a comparison to past boom-bust episodes, the approach is signaling mounting vulnerabilities in risky U.S. credit markets. Policy makers and regulators should be attune to any further deterioration in issuance quality, and where possible, take steps to ensure the post-crisis financial infrastructure is braced to accommodate a re-pricing in credit risk.

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Global Financial Stability Report: A Report by the Monetary and Capital Markets Department on Market Developments and Issues (Last Updated Wednesday October 08, 2014)

October 9, 2014 Comments off

Global Financial Stability Report: A Report by the Monetary and Capital Markets Department on Market Developments and Issues
Source: International Monetary Fund

The October 2014 Global Financial Stability Report (GFSR) finds that six years after the start of the crisis, the global economic recovery continues to rely heavily on accommodative monetary policies in advanced economies. Monetary accommodation remains critical in supporting the economy by encouraging economic risk taking in the form of increased real spending by households and greater willingness to invest and hire by businesses. However, prolonged monetary ease may also encourage excessive financial risk taking.

Middle East Transitions: A Long, Hard Road

August 11, 2014 Comments off

Middle East Transitions: A Long, Hard Road
Source: International Monetary Fund

Since the onset of the Arab Spring, economic uncertainty in Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen (Arab Countries in Transition, ACTs) has slowed already sluggish growth; worsened unemployment, particularly of youth; undermined business confidence, affected tourist arrivals, and depressed domestic and foreign direct investment. Furthermore, political and social tensions have constrained reform efforts. Assessing policy options as presented in the voluminous literature on the Arab Spring and based on cross-country experience, this paper concludes that sustainable and inclusive growth calls for a two pronged approach: short term measures that revive growth momentum and partially allay popular concerns; complemented with efforts to adjust the public’s expectations and prepare the ground for structural reforms that will deliver the desired longer tem performance.

The IMF crisis and how to solve it

August 7, 2014 Comments off

The IMF crisis and how to solve it
Source: Oxford Economics

As the IMF approaches its 70th birthday, this extract from our July UK Economic Outlook investigates the Fund’s Greek programme, one of the most credibility-sapping in its history. We trace the IMF’s role in the programme from its stormy launch to misfiring implementation; the Fund’s half-hearted apology; and its early (and ongoing) attempts to draw lessons and revise its sovereign debt restructuring framework, which appear destined to deliver insufficient meaningful change. A transparency revolution is both necessary and feasible. It worked for central banks in the 1990s. Why not the Fund?

Debt, Growth and Natural Disasters: A Caribbean Trilogy

August 4, 2014 Comments off

Debt, Growth and Natural Disasters: A Caribbean Trilogy
Source: International Monetary Fund

This paper seeks to determine the effects that natural disasters have on per capita GDP and on the debt to GDP ratio in the Caribbean. Two types of natural disasters are studied –storms and floods– given their prevalence in the region, while considering the effects of both moderate and severe disasters. I use a vector autoregressive model with exogenous natural disasters shocks, in a panel of 12 Caribbean countries over a period of 40 years. The results show that both storms and floods have a negative effect on growth, and that debt increases with floods but not with storms. However, in a subsample I find that storms significantly increase debt in the short and long run. I also find weak evidence that debt relief contributes to ease the negative effects of storms on debt.

Impact of Fed Tapering Announcements on Emerging Markets

July 21, 2014 Comments off

Impact of Fed Tapering Announcements on Emerging Markets
Source: International Monetary Fund

This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.

Future of Asia’s Finance: How Can it Meet Challenges of Demographic Change and Infrastructure Needs?

July 18, 2014 Comments off

Future of Asia’s Finance: How Can it Meet Challenges of Demographic Change and Infrastructure Needs?
Source: International Monetary Fund

There is a role for Asia’s financial sector to play to address the challenges associated with the region’s changing demographics and infrastructure investment needs. Enhancing financial innovation and integration in the region could facilitate intra-regional financial flows and mobilize resources from the aging savers in industrialized Asia to finance infrastructure investment in emerging Asia. Strengthening the financial ties within the region as well as with the global financial markets alongside appropriate prudential frameworks could also help diversify sources of financing and reduce the cost of funding in emerging Asia. Finally, financial deepening could help ease the potential overheating from scaling up infrastructure investment and hence achieve a more balanced growth in the region.

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