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insufficiency of aggregate demand as a growth deterrent prevailing after the 2008 global financial crisis, have been superseded by supply-side shocks and inflation.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 The Fed’s Focus on the Labor Market

The Fed’s Focus on the Labor Market

Monetary tightening is aimed at slowing demand growth relative to aggregate supply, which will require a sustained period of below-trend US economic growth. It is in the labor market that the Fed's monetary policy script will be written. Judging by Powell's presentation last week at Brookings, and given the outstanding fears of price-wage spirals.

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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.

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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.

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Read more about the article Is the U.S. Economy in Recession?

Is the U.S. Economy in Recession?

There are reasons to consider the US recession call as currently premature , even recognizing clear and undeniable signs of an economic growth slowdown at the margin. As suggested by the resilience of private consumption in the second quarter, the labor market remained tight. Markets have come to assign a high probability that the Fed will “pivot”, and reverse its tightening direction, given signs of an economic slowdown. It seems premature to bet on such a "pivot" by the Fed, and the recent refreshment of stock and bond markets tends to be reversed. Two points remain unclear: if the economy does indeed fall into a recession, how shallow or deep will it be? How rigid downward will the inflation rate measured by its core turn out to be?

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Read more about the article Tightening Financial Conditions Have Affected Asset Values

Tightening Financial Conditions Have Affected Asset Values

Even knowing that there is a time lag between interest rate decisions and their effects, the Fed will not be able to ignore what happens to monthly inflation rates during the crossing until next year. Even if that poses a risk to a soft landing of the economy. What seems more likely, however, appears to be the combination of a global economic slowdown and continued tightening of global financial conditions. With equity markets in advanced economies still exhibiting downward slides until the monetary-financial grip stops.

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Read more about the article Quantitative Tightening and Capital Flows to Emerging Markets

Quantitative Tightening and Capital Flows to Emerging Markets

In addition to hikes in basic interest rates, liquidity conditions in the US economy will also be affected by the shrinking of the Fed's balance sheet starting this month. The "quantitative easing" (QE) that resumed strongly in March 2020, in response to the financial shock at the beginning of the pandemic, will now give way to a "quantitative tightening". How complementary - or substitute - will be those movements in interest rates and balance sheet downsizing? What are their likely consequences on capital flows to emerging markets?

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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 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 Will Another Taper Tantrum Hit Emerging Markets?
Finance investment stock market chart graph currency exchange global business fintech ++The World map texture derived from public domain NASA: http://visibleearth.nasa.gov. Traced in Illustrator. File created on November 29 2018++

Will Another Taper Tantrum Hit Emerging Markets?

Market movements this month have led to renewed fears that changes in US financial and monetary conditions will trigger a painful wave of capital flight from emerging markets, as happened in 2013. But times have changed, and the greatest risks to emerging markets now lie elsewhere.

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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 A Possible Tug-of-war Between the Fed and the Markets

A Possible Tug-of-war Between the Fed and the Markets

There appears to be a double divergence between the market and the Fed. The inflation projections embedded in bond prices remain above those presented by the Fed. In addition, there appears to be a discrepancy between the mode of action announced by the Fed and what the markets predict as the Fed’s ‘reaction function’. The 10-year rise in market yields this year has been more pronounced than in previous times of instability, such as the 2013 taper tantrum and the sell-off of government bonds. The Fed's current complacency in relation to long yields can always be superseded by a revision of such a position for the sake of stabilization, if volatility increases in the long part of the yield curve.

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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.

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Read more about the article The size of Biden’s fiscal package

The size of Biden’s fiscal package

According to Treasury Secretary Janet Yellen, it would be better to run the risk of excess than insufficiency. In addition, the Federal Reserve's new monetary policy regime puts the 2% inflation target as an average, not as a ceiling forcing monetary policy to act to prevent it in advance. After a long period of inflation below 2%, even in years with low unemployment and interest rates on the floor, monetary authorities can afford to wait some time with above-average inflation until they are compelled to pull the brake.

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