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.

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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.

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Read more about the article Unpacking the Relationship between Crude Oil Financialization and Volatility: The Tale of Speculative Positions

Unpacking the Relationship between Crude Oil Financialization and Volatility: The Tale of Speculative Positions

This paper explores the impact of commodities financialization on crude oil prices and their volatility. While some commodities have been market movers for centuries, introducing others, such as oil, to the financial markets is more recent. The increase in investors' appetite for commodity investing has led to commodities’ financialization, which is often considered an amplifier of commodity price volatility. This paper focuses on the relationship between crude oil prices and the financialization argument through the commitment of traders undertaking long and short positions on the WTI crude oil to study their impact on spot prices and, thus, on crude oil's volatility. It reviews recent swings in oil prices and the correlation between prices of crude oil and speculative positions in financial markets. It also focuses on the relationship between crude oil prices, speculative positions, and volatility represented by the CBOE Crude Oil Volatility ETF through econometric models. The aim is to bring additional information to the literature on whether commodities financialization, specifically the presence of hedgers on crude oil markets, are linked to the volatility in energy markets. We rely on tools such as correlation levels, the Granger Causality test, Vector Autoregression, and Fully Modified Least Square models to study if additional speculative activity in the Crude Oil market is responsible for adding pressure to oil prices on financial markets. We then conclude with the direction of the link between prices and speculative positions, if investors are shaping the market prices and contributing to higher volatility.

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Read more about the article Macroeconomic Policy Regime Change in Advanced Economies

Macroeconomic Policy Regime Change in Advanced Economies

Three significant changes to the macroeconomic policy regime in advanced economies, compared to the post-global financial crisis period, have unfolded in the last two years. First, fears of a chronic insufficiency of aggregate demand as a growth deterrent prevailing after the 2008 global financial crisis, have been superseded by supply-side shocks and inflation. Second, as a result of the first change, the era of abundant and cheap liquidity provided by central banks has given way to higher interest rates and liquidity squeezes. Finally, because of the previous changes, there was a strong devaluation of financial assets in 2022. There are now fears about multiple possibilities of financial shocks ahead.

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Read more about the article Bridging Green Infrastructure and Finance

Bridging Green Infrastructure and Finance

Development and the changing climate will both require a substantial increase in green infrastructure investment over the next few decades in emerging market and developing countries (EMDEs). The need for investments collides with limited fiscal space in EMDEs, an obstacle that has been aggravated by the multiple shocks faced by those economies in the last few years. At the same time, those investments potentially dovetail with excess financial savings in advanced economies (AEs). In this chapter, we explore how a bridge connecting excess savings in AEs and green infrastructure investment in EMDEs might be built.

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Read more about the article Dollar dominance will remain

Dollar dominance will remain

The heavy financial sanctions on Russia after the invasion of Ukraine sparked speculations that the weaponization of access to reserves in dollars, euros, pounds, and yen would spark a division in the international monetary order. There has been a reduction in the degree of "dollar dominance” with the dollar's share of central bank reserves falling since the beginning of the century. The relative dominance of the dollar appears to be declining but at a very gradual pace.

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Read more about the article The Metamorphosis of Finance and Capital Flows to Emerging Market Economies

The Metamorphosis of Finance and Capital Flows to Emerging Market Economies

The decade after the Great Financial Crisis of 2007–09 brought significant changes in the volume and composition of capital flows in the global economy. Portfolio investments and other non-bank financial intermediaries are responsible for an increasing share of foreign capital flows, while banking flows have shrunk in relative terms. This paper considers the implications of such a metamorphosis of finance for capital flows to emerging market economies (EMEs). After examining capital flows from the global financial crisis to the 2020-21 pandemic crisis, we analyze the extent to which a normalization of monetary policies in advanced economies may lead to shocks in those flows, as well as why exchange rate fluctuations between the U.S. dollar and other major currencies can affect capital flows to EMEs. Finally, we assess the range of policy instruments that EME policymakers tend to resort to manage risks derived from capital-flow volatility.

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Read more about the article Risk mitigation tools to crowd in private investment in green technologies

Risk mitigation tools to crowd in private investment in green technologies

In order to close the financing gap in green technologies, finding new mechanisms to enhance the participation of the private sector, combined with that of the public sector, in financing sustainable and climate-resilient infrastructure is a must. In this context, some unlisted instruments are going to be needed to enhance financing of green infrastructures. Besides, the development of properly structured projects, with risks and returns in line with the preferences of the different types of investors and financial agents that make up the ecosystem of financing sources, would also help to close the private financing gap in infrastructure.

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Read more about the article Emerging market capital flows after Covid-19

Emerging market capital flows after Covid-19

With loose money supply and low returns in the developed world, emerging markets have become the destination of choice for investors looking for high yields. However, with much uncertainty remaining and inflation well above the Federal Reserve’s target rate, speculation of Fed tapering and market tantrums are gaining momentum. OMFIF is convening a panel to look at capital flows in emerging markets, addressing what happens when the cycle turns, the likelihood of capital flows reverting and asset and currency markets in the developing world.

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Read more about the article U.S. Bubble-Led Macroeconomics

U.S. Bubble-Led Macroeconomics

Macroeconomic dynamics in the U.S. economy has increasingly become associated with asset price fluctuations in the past few decades. Financial conditions have increasingly become an influential factor shaping the cyclical pace of the macroeconomy. There has been a mismatch between rising financial wealth and the pace of creation and incorporation of new assets. Several secular stagnation hypotheses offer explanations for the insufficient creation of new assets. Public debt—and its partial monetization by central banks—has played a stabilizing role by boosting the net supply of assets available to accommodate the demand for financial assets. The U.S. big balance sheet economy has been on a growth path highly dependent on the continuity of low real interest rates, as well as stretched price-earnings ratios of stocks and high corporate debt. Periodic episodes of downward adjustment of asset prices have been countervailed with lax monetary policies.

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Read more about the article Financial Globalization

Financial Globalization

Financial integration of countries and financial globalization led to an extraordinary rise of foreign assets and liabilities as a share of GDP, followed by stability of total flows since the global financial crisis of 2008-2009. The apparent stability has been marked by an underlying metamorphosis of cross-border finance, with de-banking and rising foreign direct investment and non-banking financial flows. Blind spots and potential instability remain.

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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.

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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.

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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.

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