Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues.
The Year 2023
Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies, September 2023 Edition
Many emerging market and developing economies face a difficult trade-off between economic support and fiscal sustainability. Market-oriented structural reforms ease this trade-off by promoting economic growth and strengthening public finances. The empirical analysis in this note, based on 62 EMDEs over 1973-2014, shows that reforms are associated with sizeable and long-lasting reductions in the debt-to-GDP ratio mainly through higher fiscal revenues and lower borrowing costs. These effects are larger in countries with greater tax efficiency, lower informality, and higher initial debt.
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The Year 2022
Chasing the Sun and Catching the Wind: Energy Transition and Electricity Prices in Europe/ IMF White Papers, November 2022
European power markets are in the midst of unprecedented changes, with a tightening supply-and-demand balance. Wholesale electricity prices in Europe increased by more than 400 percent from an average of €35 per megawatt-hour (MWh) in 2020 to almost €250 per MWh in December 2021 even before the war in Ukraine, which pushed the average wholesale price of electricity above €500 per MWh in March 2022. Under the marginal pricing method underlying wholesale electricity prices in Europe, the most expensive technology needed to meet demand within a given period sets the final price of electricity according to the cost of production, which in turn depends on energy sources used in electricity generation.
While the recent surge in oil and natural gas prices has certainly contributed to higher cost of electricity generation, the volatility of wholesale electricity prices depends on a broader set of factors including availability in generating units and intermittent output of renewables. For example, increasing the share of renewables in electricity production in Europe from an average level of 14 percent during the period 2014–2021 to 30 percent would lower wholesale electricity prices by 8.8 percent—and by almost 20 percent if the share of solar and wind reaches 50 percent.
Building better electricity interconnections is necessary to increase cross-country electricity trade within Europe. This would improve the efficient allocation of electricity, especially considering the intermittent and volatile production of renewable sources.
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The Year 2021
Negative interest rates – so far, so good/ IMF White Papers, March 2021
Since 2012, a number of central banks introduced negative interest rate policies. Central banks in Denmark, Euro area, Japan, Sweden, and Switzerland turned to such policies in response to persistently below-target inflation rates. The move reflected the central banks’ struggle to boost inflation even when they had already pushed interest rates to zero. The effects of the COVID-19 crisis, in an environment where many central banks are constrained, have brought back negative interest rate policies to the forefront.
Based on the evidence to date, these fears have largely failed to materialize. Negative interest rate policies have proven their ability to stimulate inflation and output by roughly as much as comparable conventional interest rate cuts or other unconventional monetary policies. For example, some estimate that negative interest rate policies were up to 90 percent as effective as conventional monetary policy. They also led to lower money-market rates, long-term yields, and bank rates.
Deposit rates for corporate deposits have dropped more than those on retail deposits, because it is costlier for companies than for individuals to switch into cash. Bank lending volumes have generally increased. And since neither banks nor their customers have markedly shifted to cash, interest rates can probably become even more negative before that happens.
Whats more positive, any adverse effects on bank profits and financial stability have been limited, so far. Overall, bank profits have not deteriorated, although banks that rely more on deposit funding, as well as smaller and more specialized banks, have suffered more. Larger banks have boosted their lending activities, introduced fees on deposit accounts, and benefited from capital gains, while the increase in bank risk-taking does not appear to have been excessive. Of course, it is possible that the absence of a significant impact on bank profitability mostly reflects shorter-term effects, which could potentially be reversed over time. And side effects may still arise if policy rates go even more negative.
Given this evidence, why haven’t more central banks jumped on board? The reasons are likely related to institutional and other country characteristics. Institutional and legal constraints may play a role, and some financial systems, because of their structure or interconnection with global financial markets, may be more prone to suffer adverse side effects from negative interest rate policies. For example, countries with many small banks that rely more on household deposits as a main source of funding may be more reluctant to adopt negative interest rates.
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Vaccines Inoculate Markets, but Policy Support Is Still Needed –
Global financial stability update, Jan 2021
Until vaccines are widely available, the market rally and the economic recovery remain predicated on continued monetary and fiscal policy support. Policy accommodation has mitigated liquidity strains so far, but solvency pressures may resurface in the near future, especially in riskier segments of credit markets and sectors hit hard by the pandemic. Profitability challenges in the low-interest-rate environment may weigh on banks’ ability and willingness to lend in the future. Announcements of earlier-than-anticipated effective COVID-19 vaccines have boosted market sentiment and paved the way for the global economic recovery. In advanced economies, investment-grade and high-yield corporate bond spreads have tightened sharply— close to or even below pre-February 2020 levels— while rates have reached record lows, as investors continue to reach for yield. Many advanced economies, such as Canada, some European Union countries, the United Kingdom, and the United States, have prepurchased vaccines, with large per capita coverage. However, delayed access to comprehensive health care solutions could mean an incomplete global recovery and endanger the global financial system. Large and persistent fiscal deficits in most emerging and frontier market economies are likely to persist in 2021, albeit to a smaller extent than in 2020. While solvency pressures have been limited so far, risks in the nonfinancial corporate sector will remain. Household debt may rise, on the back of accommodative financial conditions. Banks entered the pandemic with a large amount of capital and high liquidity buffers and have shown resilience so far, and unprecedented policy support has helped maintain the flow of credit to households and firms. Capital markets are gaining importance as a source of funding to combat climate change and achieve social goals, and they can play a crucial role in greening the recovery. In the end, ongoing policy support remains necessary until a sustainable recovery takes hold to prevent the pandemic crisis from posing a threat to the global financial system.
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The Year 2020
Dominant currencies and external adjustments – Oct 2020 WP
There is ongoing debate about the role of exchange rates in facilitating external rebalancing and buffering macroeconomic shocks as countries become more integrated in trade and finance. The dominance of the US dollar implies that the observed weakening of emerging and developing countries’ currencies is unlikely to provide material boost to their economies in the short term as the response of goods exports will be muted while some sectors that would normally respond more to exchange rates—like tourism—are likely to be impaired by COVID-related containment measures and consumer behavior changes.
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Global Financial Stability Report – April 2020: Markets in the times of COVID-19.
The COVID-19 pandemic poses unprecedented health, economic, and financial stability challenges. The first priority, of course, is to save lives. But the necessary containment measures to limit the spread of the virus are causing a dramatic decline in economic activity. As a result, in only three months, the 2020 outlook has shifted from expected growth of more than 3 percent globally to a sharp contraction of 3 percent—much worse than the output loss seen during the 2008–09 global financial crisis. The ultimate impact of the crisis on the global economy, as well as the timing of a recovery, is highly uncertain. This crisis presents a very serious threat to the stability of the global financial system.
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China’s Growth Potential—A Stocktaking and Reassessment (edition November 2019)
China’s growth potential has become a hotly debated topic as the economy has reached an income level susceptible to the “middle-income trap” and financial vulnerabilities are mounting after years of rapid credit expansion. However, the existing literature has largely focused on macro level aggregates, which are ill suited to understanding China’s significant structural transformation and its impact on economic growth. Going forward, ample room remains for further convergence, but the shrinking distance to the frontier, the structural shift from industry to services, and demographic changes will put sustained downward pressure on growth, which could slow to 5 percent by 2025 and 4 percent by 2030.
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A Capital Market Union for Europe (edition September 2019)
European capital markets are relatively small, resulting in strong bank-dependence, and are split sharply along national lines. About 40 percent of EU households’ savings are held as bank deposits, compared with 10 percent in the United States; only 30 percent of EU nonfinancial firms’ liabilities are securities; and more than half of EU long-term investors’ assets are domestic claims. Europe has a large banking system and small capital markets. Bank assets are 300 percent of GDP in the euro area, dwarfing the United States’ 85 percent of GDP but below Japan’s 500 percent. Listed equity stands at 68 percent of GDP, well short of the United States’ 170 percent of GDP and Japan’s 120 percent—although the euro area towers above the others in unlisted equity. Private sector debt securities outstanding amount to almost 85 percent of GDP in the euro area, more than Japan’s 65 percent of GDP but less than the United States’ 100 percent.
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