Read more about the article Emerging Markets and Developing Economies in the Global Financial Safety Net

Emerging Markets and Developing Economies in the Global Financial Safety Net

When countries face external financial shocks, they must rely on financial buffers to counter such shocks. The global financial safety net is the set of institutions and arrangements that provide lines of defense for economies against such shocks. From any individual country standpoint, there are three lines of defense in their external financial safety nets: international reserves, pooled resources (swap lines and plurilateral financing arrangements), and the International Monetary Fund. We argue here that there is a need to extend and facilitate access to the ultimate global financial safety net layer: the IMF. We illustrate that by pointing out how Morocco and Mexico have boosted their defensive power by having access to IMF precautionary lines of credit.

Continue ReadingEmerging Markets and Developing Economies in the Global Financial Safety Net
Read more about the article Central Bank Digital Currencies in Africa

Central Bank Digital Currencies in Africa

Central Bank Digital Currencies (CBDCs) are digital versions of cash issued and regulated by central banks. They correspond to digital money denominated in the national unit of account and liability of the central bank. By mid-2022, almost 100 CBDCs were being subject to research or testing. Two had already been launched, one of them in Nigeria (eNaira) and the other in the Bahamas. According to a survey by the BIS (Bank for International Settlements) last year, 90% of central banks there approached were undertaking CBDC analysis or projects in the previous year, with 26% already implementing pilot projects (Kosse and Mattei, 2022). Potential benefits from CBDCs include the facilitation of financial inclusion, more resilient domestic payments, and enhanced competition. Beyond improving access to money, payment efficiency and lower transaction costs may be attained. On the other hand, some risks and challenges will have to be faced. As we approach in this chapter, African central banks are part of such a global trend. Most are yet in the beginning (research and analysis), while Nigeria has already issued a retail CBDC, and South Africa and Ghana are implementing pilot projects (wholesale and retail, respectively). Without CBDCs can enhance the public good nature of the monetary system, with the central bank at the core of safe, low-cost, and inclusive payments. Some broad risks and challenges are also highlighted. First, we summarize how a monetary system can be strengthened with digital finance and new private forms of digital money if not being based on cryptocurrencies. Second, we approach the motivations of African central banks for CBDCs. Finally, we call attention to some of the challenges and risks accompanying such a move to CBDCs.

Continue ReadingCentral Bank Digital Currencies in Africa
Read more about the article Whither the Phillips Curve?

Whither the Phillips Curve?

There is an international movement to tighten monetary and fiscal policies as a response to the global inflation phenomenon. Accordingly, global economic growth projections for 2022 and 2023 have been revised downward. As inflation will decline only gradually, given the price stickiness of its core components, there is likely to be momentarily a situation of stagflation, i.e. a combination of significant inflation and low or negative GDP growth. We discuss how the current global stagflation experience might develop into one of a soft landing, a sharp downturn, or a deep recession. The evolution will depend on how fast inflation responds downward to economic deceleration. We therefore suggest framing the response in terms of assessing to where major economies’ Phillips curves have shifted. Phillips-curve shifts will also reflect cross-border repercussions of country-specific policy choices. Furthermore, sudden abrupt deteriorations of financial conditions may cause additional moves in Phillips curves.

Continue ReadingWhither the Phillips Curve?
Read more about the article Podcast – Monetary policy, climate change and inequalities: should central banks expand their policy toolkit?

Podcast – Monetary policy, climate change and inequalities: should central banks expand their policy toolkit?

In the current context of persistent inflationary pressures and growing uncertainties about the economic outlook, many central banks have mainly focused on their mandate of price stability through more aggressive monetary policies. In addition, the growing concerns linked to climate change and inequalities have shaped the policy discussions related to expanding the traditional mandates of central banks (price stability and/or maximum sustainable employment) to take into account major ethical issues in the design and implementation of monetary policies such as climate change and inequalities. In this podcast, Otaviano Canuto, senior fellow at the Policy Center for the New South, shares his insights on the role of central banks in the current context and whether they should expand the monetary policy toolkit to include climate change and inequalities.

Continue ReadingPodcast – Monetary policy, climate change and inequalities: should central banks expand their policy toolkit?
Read more about the article Helicopter Reserves to the Rescue

Helicopter Reserves to the Rescue

A new allocation of US$650 billion in Special Drawing Rights (SDRs) by the International Monetary Fund (IMF) to its member countries has entered into force last Monday. The extraordinary character of the allocation initiated this time is seen in the fact that its amount corresponds to more than double the sum of all allocations made to date. As allocations follow country IMF quotas, relief for those in need of reserves will come as an excess in other cases. The IMF set out to find ways in which countries with SDR surpluses can voluntarily channel them to those in need.

Continue ReadingHelicopter Reserves to the Rescue
Read more about the article China’s renminbi needs convertibility to internationalize

China’s renminbi needs convertibility to internationalize

Commercial transactions and reserves of central banks and other global public investors could strengthen the position of the Renminbi as an alternative currency to the dollar, euro, yen and pound sterling. However, the qualitative leap towards the internationalization of the Chinese currency as a full reserve currency will only happen when confidence in its convertibility is sufficient to convince unofficial (private) investors to hold much more reserves denominated in it.

Continue ReadingChina’s renminbi needs convertibility to internationalize
Read more about the article Central Banks and Climate Change

Central Banks and Climate Change

There are three major reasons for central banks to engage on climate change issues. The first is the set of – physical and transition - risks to financial stability potentially brought about by natural disasters and trends derived from climate change. Second, the potential impact of climate change shocks and trends on economic growth and inflation and, therefore, on their monetary policy decisions. Finally, the possibility of using their balance sheets and their macroprudential toolkit to favor climate mitigation.

Continue ReadingCentral Banks and Climate Change
Read more about the article Bloated Central Bank Balance Sheets

Bloated Central Bank Balance Sheets

There are good reasons to believe that there will be no return to the pre-QE configuration of balance sheets. First, the increasing global financial integration in the last few decades has imposed increasing challenges in terms of making liquidity management effective as cross-border volumes of capital flows have expanded significantly. Second, changes to financial regulation have induced private agents to alter their behavior and strategies. Finally, a new task has come under the purview of central banks: monitoring relationships between various benchmark curves—i.e., operating as quasi-market makers. As a spill-over from abroad, central bank balance sheets in some emerging market economies also bloated. The era of bloated central bank balance sheets seems to be a component of the “new normal”, even if they undergo some diet in the future.

Continue ReadingBloated Central Bank Balance Sheets
Read more about the article Secular Stagnation and the Big Balance Sheet Economy

Secular Stagnation and the Big Balance Sheet Economy

Private balance sheets have risen relative to GDP in advanced economies in the last decades, in tandem with a trend of decline in long-term real interest rates. Asset-driven macroeconomic cycles, along with a structural trend of rising influence of finance on income growth and distribution, have become part of the landscape. Underlying secular trends of stagnation may also be suggested, making the macroeconomic dynamics dependent on the balance sheet economy getting bigger and bigger.

Continue ReadingSecular Stagnation and the Big Balance Sheet Economy
Read more about the article Climbing a High Ladder – Development in the Global Economy

Climbing a High Ladder – Development in the Global Economy

This book approaches the opportunities and challenges faced by developing countries to raise their per capita income levels during the recent phase of globalization. After dealing with the post-global financial crisis economic landscape in advanced economies, it deals with the windows of opportunity opened by trade and financial globalization for developing countries to climb the income ladder. Domestic preconditions for a developing country to benefit from those windows are then pointed out. China, Brazil, and Sub-Saharan Africa are presented as case studies. The book ends with an assessment of the impact of the coronavirus crisis on the global economy.

Continue ReadingClimbing a High Ladder – Development in the Global Economy
Read more about the article Central Banks and Inequality

Central Banks and Inequality

As in the period after the 2007-08 global financial crisis, voices have been raised talking about monetary policy and central banks as drivers of income and wealth inequality. The unconventional policies of “quantitative easing” protect the holders of financial assets and value their properties, while workers cross a rough patch on the real side of the economy. Financial markets have disconnected from hardships in the street of commons, with the help of the policies of monetary authorities. Does it make sense to assign an impact of concentration of income and wealth to central bankers' policies? It's complicated...

Continue ReadingCentral Banks and Inequality
Read more about the article Whither Interest Rates in Advanced Economies: Low for Long?

Whither Interest Rates in Advanced Economies: Low for Long?

The action of central banks has been more reactive than proactive, more reflex than cause, and in their absence, macroeconomic performance would have been even more mediocre than it has been. There is a mismatch between the trend of increasing stocks of financial wealth, occasionally cut by shocks and crises, and the creation and incorporation of new assets accompanying economic expansion. COVID-19 is helping reinforce such trends.

Continue ReadingWhither Interest Rates in Advanced Economies: Low for Long?
Read more about the article Dependency and disconnect of U.S. financial markets

Dependency and disconnect of U.S. financial markets

U.S. stock and corporate bond markets performed extraordinarily well from the March financial shock caused by covid-19 to the end of last month. Then, three consecutive weeks of decline in the three major stock market indexes have been followed this week by a global slump attributed to fears of new lockdowns. A period of disconnect of financial markets with the underlying real economy has culminated in a revelation of the former’s high dependency to Federal Reserve policies.

Continue ReadingDependency and disconnect of U.S. financial markets
Read more about the article Otaviano Canuto on Central Banks and Climate Change: Turning Black Swans Into Green

Otaviano Canuto on Central Banks and Climate Change: Turning Black Swans Into Green

There are three possible motivations for the engagement by central banks with climate change: financial risks, macro-economic impacts, and mitigation/adaptation policies. Regardless of the extent to which individual central banks incorporate the three prongs of motivations, they can no longer ignore the issue.

Continue ReadingOtaviano Canuto on Central Banks and Climate Change: Turning Black Swans Into Green
Read more about the article Central Banks and Climate Change: from Black to Green Swans

Central Banks and Climate Change: from Black to Green Swans

There are three possible justifications for the engagement by central banks with climate change issues: financial risks, macroeconomic impacts, and mitigation/adaptation policies. Regardless of the extent to which individual central banks incorporate the three prongs of motivations, they can no longer ignore climate change. Last month, a BIS book referred to a “green swan” as an adaptation of the concept of a “black swan” used in finance.

Continue ReadingCentral Banks and Climate Change: from Black to Green Swans