From the introduction of the euro in 1999 to the Greek crisis in 2010, the Eurozone witnessed external imbalances between countries at its core and those at its periphery. These imbalances have been attributed either to differences in competitiveness or to the effect of financial integration. This column argues that in order to understand the imbalances within the Eurozone, it is necessary to consider credit costs and capital flows. The lower real cost of credit for high-inflation countries must be taken into account, as well as the inflow of capital to the non-tradable sector that this implies. Monetary policy cannot be conducted in a ‘one size fits all’ manner.
Mouhamadou Sy, 09 November 2015
Gita Gopinath, Sebnem Kalemli-Ozcan, Loukas Karabarbounis, Carolina Villegas-Sanchez, 28 September 2015
Joining the Eurozone was once a near unquestionably good idea. Now, the costs of joining the monetary union are under close scrutiny. This column takes a slightly different tack, presenting an alternative perspective on how joining the euro has impacted productivity in southern Europe. It turns out that capital wasn’t allocated efficiently across firms after cheap borrowing at low interest rates, impacting total factor productivity.
Eugenio Cerutti, Stijn Claessens, Damien Puy, 09 September 2015
Recent economic and financial events, such as the ‘taper tantrum’, have highlighted again the relevance of global factors in driving capital flows to emerging markets. This column suggests that capital flows to emerging markets move in part due to global push factors. However, sensitivity to these push factors differs greatly across types of flows and emerging markets. How much push factors affect individual emerging markets depends on their local liquidity and the composition of their foreign investor bases. Countries relying more on international funds and global banks are significantly more affected by changes in push factors.
Erik Feyen, Swati Ghosh, Katie Kibuuka, Subika Farazi, 11 August 2015
Monetary policies pursued by developed countries in the wake of the Global Crisis have had profound spillover effects on emerging economies. This column documents the unprecedented post-Crisis bond issuance surge in emerging markets. The findings indicate that benign international funding conditions favoured bond issuance in these economies. But the large issuance volumes, currency risks, and high exposure to global factors could pose a challenge for policymakers, particularly when global cycles reverse.
Ross Levine, Chen Lin, 02 July 2015
Labour market regulations have important implications for both the incidence of cross-border acquisitions, and the outcomes for acquiring firms. This column explores how variations in labour regulations between countries affect cross-border acquisitions and subsequent firm performance. For a sample of 50 countries, firms are found to enjoy larger returns when they acquire a target in a country with weaker labour regulations than the acquirer’s home country.
Pınar Yeşin, 21 February 2015
Safe haven inflows to Switzerland during global turmoil have been mentioned numerous times by the financial press and international organisations. However, recent research cannot find evidence for surges of capital inflows to Switzerland. In fact, this column argues that private capital inflows to and outflows from Switzerland have become exceptionally muted and less volatile since the Crisis. By contrast, net private capital flows have shown significantly higher volatility since the Crisis, frequently registering extreme movements. However, these extreme movements in net flows are not driven by surges of inflows.
Erlend W Nier, Tahsin Saadi Sedik, 04 January 2015
Large and volatile capital flows into emerging economies since the Global Financial Crisis have re-invigorated efforts to unearth the determinants of these flows. This column investigates the interplay between global risk aversion (captured by the VIX) and countries’ characteristics. The authors also explore what policies countries should employ to protect themselves against the volatility of capital flows. The findings indicate that capital flows to emerging markets cannot be controlled without incurring substantial costs.
Vincent Bouvatier, Anne-Laure Delatte, 14 December 2014
Eurozone financial integration is reversing, with 2013 cross-border capital flows at 40% of their 2007 level. This column discusses research showing that banking integration has in fact strengthened in the rest of the world.
Dennis Reinhardt, Cameron McLoughlin, Ludovic Gauvin, 05 November 2014
In the aftermath of the Global Crisis, policymakers and academics alike discussed how uncertainty surrounding macroeconomic policymaking has impacted domestic investment. At the same time, concerns regarding the spillover impact of monetary policy in advanced economies on emerging market economies featured strongly in the international policy debate. This column draws the two debates together, and examines how policy uncertainty in advanced economies has spilled over to emerging markets via portfolio capital flows. It finds remarkable differences in the spillover effects of EU vs. US policy uncertainty.
Atish R Ghosh, Mahvash Saeed Qureshi, Naotaka Sugawara, 30 October 2014
Capital flows to emerging markets have been very volatile since the global financial crisis. This has kindled debates on whether – and how – to better manage cross-border capital flows. In this column, the authors examine the role of capital account restrictions in both source and recipient countries in taming destabilising capital flows. The results indicate that capital account restrictions at either end can significantly lower the volume of cross-border flows.
Olivier Blanchard, 03 October 2014
Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.
Christoph Trebesch, Helios Herrera, Guillermo L. Ordoñez, 06 September 2014
Financial crises are often credit booms gone bust. This column argues that ‘political booms’, defined as an increase in government popularity, are also a good predictor of financial crises. The phenomenon of ‘political booms gone bust’ is, however, only observable in emerging markets. In these countries, politicians have more to gain from riding the popularity benefits of unsustainable booms.
Philippe Bacchetta, Kenza Benhima, 24 August 2014
Among the various explanations behind global imbalances, the role of corporate saving has received relatively little attention. This column argues that corporate saving is quantitatively relevant, and proposes a theory that is consistent with the stylised facts and useful for understanding the current phase of global rebalancing. The theory implies that, while the economic contraction originating in developed countries has pushed interest rates towards the zero lower bound, the recent growth slowdown in emerging countries could push them out of it.
Gaston Gelos, Hiroko Oura, 23 August 2014
The landscape of portfolio investment in emerging markets has evolved considerably over the past 15 years. Financial markets have deepened and become more internationally integrated. The mix of global investors has also changed, with more money intermediated by mutual funds. This column explains that these changes have made capital flows and asset prices in these economies more sensitive to global financial shocks. However, broad-based financial deepening and improved institutions can enhance the resilience of emerging-market economies.
Linda Goldberg, Signe Krogstrup, John Lipsky, Hélène Rey, 26 July 2014
The dollar’s dominant role in international trade and finance has proved remarkably resilient. This column argues that financial stability – and the policy and institutional frameworks that underpin it – are important new determinants of currencies’ international roles. While old drivers still matter, progress achieved on financial-stability reforms in major currency areas will greatly influence the future roles of their currencies.
Paolo Giordani, Michele Ruta, Hans Weisfeld, Ling Zhu, 23 June 2014
Capital controls may help countries limit large and volatile capital inflows, but they may also have spillover effects on other countries. This column discusses recent research showing that inflow restrictions have significant spillover effects as they deflect capital flows to countries with similar economic characteristics.
Barry Eichengreen, Andrew K Rose, 05 June 2014
Since the global financial crisis of 2008–2009, opposition to the use of capital controls has weakened, and some economists have advocated their use as a macroprudential policy instrument. This column shows that capital controls have rarely been used in this way in the past. Rather than moving with short-term macroeconomic variables, capital controls have tended to vary with financial, political, and institutional development. This may be because governments have other macroeconomic policy instruments at their disposal, or because suddenly imposing capital controls would send a bad signal.
Kristin Forbes, 05 February 2014
The Federal Reserve’s ‘taper talk’ in spring 2013 has been blamed for outflows of capital from emerging markets. This column argues that global growth prospects and uncertainty are more important drivers of emerging-market capital flows than US monetary policy. Although crises can affect very different countries simultaneously, over time investors begin to discriminate between countries according to their fundamentals. Domestic investors play an increasingly important – and potentially stabilising – role. During a financial crisis, ‘retrenchment’ by domestic investors can offset foreign investors’ withdrawals of capital.
Willem Buiter, 10 January 2014
Fiscal sustainability has become a hot topic as a result of the European sovereign debt crisis, but it matters in normal times, too. This column argues that financial sector reforms are essential to ensure fiscal sustainability in the future. Although emerging market reforms undertaken in the aftermath of the financial crises of the 1990s were beneficial, complacency is not warranted. In the US, political gridlock must be overcome to reform entitlements and the tax system. In the Eurozone, creating a sovereign debt restructuring mechanism should be a priority.
Sebnem Kalemli-Ozcan, 07 January 2014
Financial crises are generally preceded by credit booms and a build-up of external debts. Although it is unclear whether Turkey is experiencing a financial bubble, as of 2013, 58% of the corporate sector’s debt was denominated in foreign currencies. This column argues that this explains the Central Bank of Turkey’s interventions to prop up the value of the Turkish lira. Given the relatively low level of reserves and the unfolding corruption scandal, it is a critical question how long the Bank can continue to do so.